"The history of Eureka lies in its future." - Lambert Molinelli, 1878


The author/editor of the Eureka Miner owns common shares of local mining stocks, General Moly (GMO) and Newmont Mining (NEM); together with benchmark miner Freeport-McMoRan (FCX). Please do your own research, markets can turn on you faster than a feral cat.

Thursday, April 14, 2011

Gold Gains Value - Time to Buy?

Morning Miners!

It is 5:35 AM. Have a cup of Thor's Thunder Blunder. That's Norseman shop talk for when a lightning strike causes collateral damage. Looks like the markets are his latest victim of a poorly aimed thunderbolt. Happy "Thor's day!"

Gold Gains Value - Time to Buy?

If you are a little blue about the markets there may be something to cheer you up.

Not much to feel good about in the base metals lately; in the words of the London Metal Exchange this morning, "Metals continue to look heavy." LME masters of brevity. Trading down at $4.2725/lb, copper is getting close to dipping below the $4.25/lb which makes me a little nervous. The red metal's metallic relatives aren't doing much better.

Happy about the price of oil? Maybe if you own an oil well. NYMEX has retreated from its crisis highs but is still above $100/bbl at $106.65/bbl. Let's not go to that party.

The broader markets are pretty lousy too with the S&P 500 barely above the 1,300 level after a run at 1,340 earlier this month. We're basically at late March levels and could head lower.

And what about the miners? The The Eureka Miner's Million Dollar Grubstake broke $2,000,000 on April 6. Our portfolio includes 12 stocks directly or indirectly related to the mining interests in Eureka County. Since then the Grubstake has shed nearly $100,000. Ouch.

You may point out that gold and silver are off their peaks too after setting new highs last week. Ah-ha! This is where there may be some sunshine in all these market clouds. Gold prices are falling but gold value is rising. Gold value relative to oil, silver, copper and oil has steadily moved up for the last 3-days since making a new 2011 low on Monday. On March 23rd this Report started tracking gold value with a single number computed every day, we call it the Gold Value Index or GVI for short.

The GVI is a composite of three popular ratios - gold/oil (Au:Oil), gold/silver (Au:Ag) and gold/copper (Au:Cu). Removing the currency dependency, we are asking the old questions, "How many barrels of crude can I buy with an ounce of gold? How many ounces of silver? How many pounds of copper?"

These three commodities were chosen for comparison because 1) oil is a common cost element for all miners, 2) copper has been a reliable proxy for global growth and 3) silver is a precious metal that now competes with gold for investment and as a hedge against fiat currencies.

Somewhat arbitrarily I chose June 7th of last year to give the GVI par-value of 100. As you may remember, this was the day the DOW closed below the so-called "flash crash" low recorded a month earlier and was arguably one of the worst days for the metals & miners in 2010.

On Monday, the GVI plumbed 67.68 telling us that gold value has declined more than 30% since last June. This morning the GVI just broke above its 1-month average of 69.98 to score 70.21. Not a huge move but at least we're gaining and not losing value. If you are a "value investor" this could very well be a good signal to add a little glitter to your portfolio. If you don't think gold prices are headed higher this year, maybe not. The old Colonel is sticking to his prediction that COMEX gold will break $1,570/oz before the Fourth of July.

Here's how gold stands today with respect to each of its three components of value:

gold value with respect to...

Oil: up 4.6% from its low on 4/8/11
Silver: up 0.0% from a new low set today
Copper: up 16.8% from its low on 2/7/11

Hmm...I'd like to see a little traction on silver before the ole Colonel jumps in with both feet. Something to think about pardner, especially while everything else looks pretty crummy. Stay tuned and watch the GVI everyday (see below and also in the column to your right).

Daily Market Roundup

Enough talk, let's walk the walk:

Eureka Miner's Index(EMI)

This morning the Eureka Miner's Index(EMI) is above-par at 450.27, down from yesterday's 486.24 and above the 1-month moving average of 437.31. The EMI continues to be down from the high set on January 4th but is up from the March 15th low of 262.02. The EMI is trending up from the March low but caution is again in the winds.

The EMI gives us the market temperature for the factors that have the greatest impact on mining in Eureka County. The record high for the EMI is 816.78 set 01/04/2011; the low was set 6/7/2010 at 50.7. An EMI of 100 is the boundary between good lands and bad lands for the metals & miners.

200-day averages are used in the EMI to normalize current mining company share price and are updated monthly. Upper and lower trend lines are updated weekly.

Gold Value Index (GVI)

Our newly minted Gold Value Index (GVI) is below-par at 70.21, up from yesterday's 69.93 and marks a 3-day ascent from Monday's 2011 low of 67.68. The 1-month moving average is 69.98. Today's Value Adjusted Gold Price (VAGP) is $1,739.0/oz.

The GVI gauges the value of gold in relation to oil, copper and silver independent of currency. Although gold prices have been on the rise, the GVI has been trending down since 6/7/2010 when it had a value of 100. These three commodities were chosen for relative value comparison because 1) oil is a common cost element for all miners, 2) copper has been a reliable proxy for global growth and 3) silver is a precious metal that now competes with gold for investment and as a hedge against fiat currencies.

The Value Adjusted Gold Price (VAGP) is a level that supports current oil, copper & oil prices based on historical commodity norms. If the daily COMEX gold price is below the VAGP, then gold is undervalued; if above, overvalued.

Daily Oil Watch

Latest Nevada Fuel Prices

On February 1st we identified North Sea Brent crude oil as a good barometer for the developing crisis in the Middle East and North Africa (MENA). It is still above $100/bbl with a large but narrowing spread from the North American benchmark, Western Texas Intermediate or "Texas light sweet crude", traded on the NYMEX (see note 1). The Report normally follows the latter but will track both until things settle out in the region.

Here are the key front-month contracts as of this morning:

NYMEX light sweet crude $106.65
ICE North Sea Brent crude $122.35
Spread (ICE- NYMEX) = $15.70 (Yesterday $15.16)

Here are the July contracts with a narrower spread:

NYMEX light sweet crude $107.78
ICE North Sea Brent crude $121.29
Spread (ICE- NYMEX) = $13.51 (Yesterday $13.03)

Although prices are off their crisis highs, we have $120+ Brent and $100+ NYMEX in July favoring higher oil prices through the summer. My December prediction that we would see NYMEX $100/bbl oil before the Fourth of July came true on February 23rd.

Eureka Outlook Dashboard

4-WD is ON - The miners are back on some rough roads; The VIX or "fear index" is below 25; bellwether Freeport-McMoRan (FCX) is below its 50-day and 100-day moving averages today but is comfortably above its 200-day average of $44.85 (our new warning level, 03/04 update); 10-year Treasurys are safely below 4% preserving a low-interest rate environment.

The GREEN light is turned back on for Commodity Reflation with copper trading comfortably above $3.50/lb

The GREEN light is turned on for Stable Markets with the VIX below the 30 level (what's this?)

The YELLOW light is turned on for Inflation Watch as the Federal Reserve resumes buying Treasurys (aka QE2)

The GREEN light is turned back on for Investor Confidence as investment returns to the equity markets

The RED light is turned on our Fuel Gauge with oil above $100

A ORANGE light is ON for possible adverse regulation/legislation: Mine Safety Violations, Miner's claim fee, Miner taxation, Cortez Hills, mercury emissions , General Moly Mt. Hope Water Rights, U.S. House committee debates miner workplace safety bill, R&R Partners parts ways with Nevada Mining Association, Obama budget includes mining royalty , Mineral commission fights consolidation, Democrats seek to repeal mining tax from the constitution, Rhoads, Ellison oppose repeal of net proceeds tax, Proposal could change net proceeds tax, 'You get to deduct WHAT???' Nevada lawmakers ask gold miners

Otherwise, all lights are green on the Eureka Outlook Dashboard (upper right, what's this?)

Commodity Market Morning Update

NYMEX/COMEX: Oil is down $0.46 in early trading at $106.65 (May contract, most active); Gold is up $5.6 to $1461.2 (June contract, most active); Silver is up $0.748 to $40.985 (May contract, most active); Copper is down $0.0220 to $4.2725 (May contract, most active)

Western Molybdenum Oxide is $16.62; European Molybdenum Oxide is $17.12; LME cash seller is $16.62, LME moly 3-month seller's contract is $17.12

Stock Market Morning Update

The DOW is down 95.93 points to 12,175.06; the S&P 500 is down 10.99 at 1,303.42

Miners are mixed:

Barrick (ABX) $52.60 up 0.84%
Newmont (NEM) $56.88 up 0.99%
US Gold (UXG) $9.15 up 0.66%
General Moly (Eureka Moly, LLC) (GMO) $5.23 down 1.13%
Thompson Creek (TC) $12.30 down 0.65%
Freeport-McMoRan (FCX) $52.72 up 0.78% (a bellwether mining stock spanning copper, gold & molybdenum)

The Steels are up (a "tell" for General Moly & Thompson Creek):

ArcelorMittal (MT) $35.17 down 1.26% - global steel producer
POSCO (PKX) $111.39 up 0.37% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is is up 0.04% at $1,909,794.42 (what's this?).


Colonel Possum

Note 1 - West Texas intermediate (WTI), also known as Texas light sweet, is a type of crude oil used as a benchmark in oil pricing and is the underlying commodity of New York Mercantile Exchange's (NYMEX) oil futures contracts. The price of WTI is often referenced in North American news reports on oil prices, alongside the price of North Sea Brent crude (source: Wikipedia)

Headline photograph by Mariana Titus

Write Colonel Possum at colonelpossum@gmail.com for answers to your questions or to request e-mail updates on the market

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