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The Financialization of Copper

By Joshua Brown, Financial Advisor

According to reports in the Telegraph, last week a mystery buyer stepped into the LME pits with a massive $1.5 billion purchase of copper – equal to “between 50pc and 80pc of the 350,000 tonnes in reserves”.

Many on the LME suspect that this mystery buyer is actually JPMorgan and that the bank is positioning itself ahead of their copper ETF launch. This pushed up the metal’s price to its highest level since the Lehman Brothers meltdown in September of 2008 (over $8700 per tonne).

And this kind of action could be just the beginning…

Just a few short years ago, the now-monstrous GLD ETF was but a curiosity in the gold market, an obscure financial instrument in an old-fashioned asset class. It has since become the largest private holder of bullion in the world, buying $30 million worth of gold a day and “wagging the dog” in terms of price action. It has been estimated that GLD alone represents hundreds of dollars per ounce of the spot price of gold.

And now, there are some big wagers that the same type of financialization is coming to the copper market.

Right now, there are two publicly-traded copper ETFs but they do not hold the metal itself, just the common stocks of copper miners like Freeport McMoRan. Neither of these funds has been able to attract even $50 million in assets under management and, frankly, the sector just isn’t very wide. There is also a UBS exchange traded note (ETN) product that seeks to reflect the total return of high grade copper futures …but this is still just paper (and subject to the credit risk of UBS).

There are, however, two physically-backed copper ETFs in registration with the SEC – one from Barclays iShares, the other from JPMorgan. Speculators are betting that the advent of these funds will mean big buying in the copper market as the managers seek to take on enough exposure to meet shareholder demand.

To be certain, copper is not trading at 28-month highs based purely on these coming ETFs, it has its own bull story as one of the most essential industrial metals on earth. China’s urbanization, burgeoning economic recovery in the developed world and hiccups in the supply chain caused by Chilean miner strikes are just a few of the factors to consider here. But should one or both of these physically-backed copper funds capture the imagination of the investing public, we’re talking about a whole new ballgame in an already volatile market.

JPMorgan’s copper fund will be called the “J.P. Morgan Physical Copper Shares ETF” and be based on Comex Grade A Copper. It will warehouse its physical copper in the US just like the GLD fund does. Barclays is building its own product, the “iShares Copper Trust”, around the London Metals Exchange and it too will store the underlying metal at locations around the country.

Gold and silver prices have been heavily influenced by the financial players who swing around blocks of their respective ETF shares every day on the stock market. With two physically-backed ETFs from very large banks arriving any day now, copper traders may want to brace themselves for what’s to come.

Source

NEWS: OceanaGold Announces Exploration Results from Reefton Goldfield

OceanaGold Corporation is pleased to announce exploration results from the Reefton Goldfield in the West Coast region of the South Island of New Zealand.

HIGHLIGHTS
• The “Globe Deeps” drilling program has successfully tested the Globe Progress shear beneath the current pit limits with significant mineralisation intersected up to 250m down plunge from the base of the current pit design (including RCD0008 17.8 metres @ 4.59g/t Au and RCD0110: 17.0 metres @ 3.17g/t Au).
• At the Souvenir deposit, an infill and extension drill program was completed with significant mineralised intercepts (including RRC0088: 17.3 metres @ 11.98g/t Au and RRC0117: 13.2 metres @ 5.50g/t Au). This confirmed further down-dip continuation of mineralisation. An expanded pit shell and reserve is anticipated by year end.
• Drilling of several prospective near mine coincident geologic and geochemical targets (program still in progress) has returned encouraging intersections. This includes an intercept (hole RDD0081) of 22m @ 1.67g/t Au (estimated true thickness of 4.5m) at the newly discovered Fraternal prospect approximately 1.5km to the NW of the Globe pit (Fig. 1). Further drilling of the Fraternal prospect is scheduled to commence in January 2011.
• Extensions of high-grade mineralisation beneath the General Gordon West, General Gordon East
and Empress 1 deposits were drill tested. Results from these programs (including RRC0098: 3.2m
@ 4.91g/t Au and RRC0101: 7.1m @ 4.12g/t Au) are encouraging and reflect the potential of the area. A 2,900m follow-up drill program has been completed and results are pending.

Jim Askew, Executive Chairman commented, “The results from the exploration program at Reefton are very pleasing. The team was focused early in the year on identifying priority targets and these drill results are a strong follow-on to this work. Both the Globe Deeps and Fraternal results point to new areas of mineralisation in close proximity to the processing plant and these are being followed up with additional drilling and studies.”

Full release (pdf)

NEWS: Avion Gold Produces Over 7,800 Ounces in November 2010

Avion Gold Produces Over 7,800 Ounces in November 2010, and 78,500 Ounces for the Eleven Months Ended November 2010

Company Is on Target to Meet Its Stated Goal to Produce 85,000 Ounces for the Year

Avion Gold Corporation announces November 2010 monthly production of approximately 7,827 ounces of gold from its Tabakoto/Ségala operations in Mali, West Africa. Year to date gold production for 2010 is approximately 78,490 ounces.

In November 2010, Avion processed 55,500 tonnes of ore at an average grade of 4.50 g/t Au, with a 97.5% mill recovery, for gold production of 7,827 ounces. Management continues to expect the fourth quarter production target of 20,000 ounces of gold will be exceeded, and to finish the year at the upper end of its production guidance at +85,000 ounces of gold.

Mr. Andrew Bradfield, Avion’s Chief Operating Officer, commented: “Gold production since last June has been over 7,200 ounces per month, and the Company expects this to continue in December, which will yield a 2010 total gold production of at least 85,000 ounces.”

A year-to-date total of 305,000 tonnes of waste material has been mined at the Dioulafoundou deposit, located 3.8 kilometres from the Tabakoto process plant. The Dioulafoundou deposit has open pit Indicated Mineral Resources of 502,000 tonnes grading 5.16 g/t Au totaling 83,400 ounces of gold, and open pit Inferred Mineral Resources of 105,000 tonnes grading 5.92 g/t Au totaling 19,900 ounces of gold (Avion news release July 14, 2010). Management expects that mill feed in 2011 will come primarily from this deposit as the Company transitions from open pit mining at Segala to underground mining at the Tabakoto and Segala deposits. Mining at Dioulafoundou in November has progressed from alluvium/laterite to saprolite material. The upper portion of the mineralization is hosted in saprolite, and the Company expects to commence transporting ore to the process plant in December 2010.

Underground mine development of the Tabakoto deposit is well established. Both the North and South access drifts have been advanced approximately 141 metres each, for total development of 282 metres. Two headings were developed in each access in November, which will lead to faster advance in the future.

Engineering work on the EPCM contract to double the process plant capacity continues on schedule. Management expects that an agreement on the purchase of a SAG and ball mill will be announced in December 2010.

Full release

The Scramble for Physical Metal Intensifies

By James Turk, December 4

The scramble for physical gold and silver is intensifying.  People increasingly want to own the real thing, and not some paper substitute, all of which come with counterparty risk.  This conclusion is apparent from the following two charts of gold and silver forwards, which are based on data made available by the London Bullion Market Association through November 24th (the most recent data available).

Because gold is money, gold almost always trades in contango, meaning the future price is higher than the spot price.  The percentage difference between gold’s spot and future price is gold’s interest rate, so in this regard, gold is not different from other moneys, except gold’s interest rate is lower than those of national currencies.  Interest rates are a reflection of risk, and because gold’s purchasing power cannot be debased by central bank or government actions, the risk of losing purchasing power when holding gold is low.  So gold is rewarded by the market with a low interest rate.

If the future price is lower than spot, which is called backwardation, you can sell your metal in the spot market, invest the dollars you receive to earn interest, and then buy your metal back in the future at a lower price and profit the difference.  But there is another important factor to consider outside the math of this formula.

If you sell your physical metal in the spot market and at the same time agree with someone to buy it back at a future date, you are now holding someone’s paper promise instead of physical metal.  In other words, you have counterparty risk, which of course is avoided when you own a tangible asset like physical gold or physical silver. 

Normally, few people worry about counterparty risk.  So bullion dealers and other institutions dealing in the precious metals watch for opportunities to profit from backwardation, with the result that gold rarely, if ever, trades in backwardation, which explains why the above chart is so extraordinary.

Gold for 1-month and 3-months forward has been mainly in backwardation for more than one year.  Even more exceptional is that gold 6-months forward has been in backwardation since November 5th.  To show how rare this event is, I checked the LBMA database, which goes back to 1989.  There is not one instance of 6-month forward gold being in backwardation, which nearly confirms my own experience.  I’ve been trading the precious metals since the 1970s, and I can’t recall any time before this year when 6-months forward gold was in backwardation.  The current and continuing backwardation is truly incredible.

Note too the clear downtrend in 12-month forward gold which is approaching backwardation, which is similar to the downtrends for other forward periods.  These downtrends make clear that the demand for physical gold is intensifying.

The picture is even starker in silver.  Not only are its forwards also in clear downtrends, silver 6-months forward has been continuously in backwardation since June 2nd and mainly in backwardation for more than one year.  What does it all mean?

In a word, it is bullish.  The only way the increasing demand for physical metal can be met is with higher prices.  The higher price will at some level entice people to sell their metal and hold a national currency instead, as I explained in my previous article, The Precious Metals Power Higher.

Some skeptics may argue that gold is in backwardation because dollar interest rates are so low, which does have an element of truth to it.  This argument though ignores that dollar rates have been low since shortly after the Lehman collapse, which is months before the backwardation began to appear.  Also when the Greenspan-led Fed lowered dollar interest rates after 9-11 to near-zero levels, no backwardation appeared.

Skeptics might also argue that there is no backwardation apparent from Comex settlement prices.  Aside from the fact that Comex recently changed the method to determine settlement prices from a market-driven basis to instead allow a manual override, which now makes backwardation on the posted Comex settlement prices virtually impossible, one has to first recognize that Comex is first and foremost a market for paper-gold and paper-silver.  Therefore, a piece of paper can promise virtually anything, without regard to the underlying reality of how physical metal is actually trading.  In other words, Comex shows March futures in contango, when they should in reality be in backwardation.  Thus, if you are buying March silver or April gold futures, you are overpaying.  This overpayment is no doubt going into the pockets of those banks that are perennially short and use their size to control the paper market.  They can, after all, always conjure up whatever paper they want out of thin air, which of course they cannot do with physical metal.

Any way you look at it, the backwardation in gold and silver is a truly rare event and an exceptionally bullish one too.  So be prepared for an upside explosion in the price of both precious metals as the scramble for physical metal intensifies even further as a result of people increasingly choosing to hold a safe-haven tangible asset instead of paper.

This article is written by James Turk of Goldmoney.com and with his kind permission, O B Research has been privileged to publish his work on our website. To find out more about Goldmoney, please visit:

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