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

DISCLOSURE

The author/editor of the Eureka Miner owns common shares of local mining stocks, General Moly (GMO), McEwen Ming (MUX) 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, May 19, 2011

Why the Colonel Isn't Worried about the Price of Gold



Þūnresdæg
Morning Miners!

It is 5:49 AM. Come in from the snow and have a cup of Thor's Spring Thunder. Last week I said our favorite Norseman had fashioned a bird feeder from a Model T differential case. A few readers have asked what the Colonel was talking about so Mariana took a picture of his contraption for today's headline photo. You won't see Thor because he's got K.P. duty this morning. I wasn't pleased that he threw thunderbolts so close to town yesterday afternoon; now, he's paying the price for his explosive indiscretion. Have a happy "Thor's Day!"

Mt. Hope in Clouded Splendor

Before we talk about gold, take a look at this terrific photo a faithful reader and friend of this report sent in yesterday - Mt. Hope in clouded splendor.


Why the Colonel Isn't Worried about the Price of Gold

I'm more worried about snow this morning than the price of gold. The Colonel needs to fix the wind damage to his wood shed roof from a few days ago and this spring snow is in my way. Of course, the high winds were telling me the snow was coming - life in the Great Basin!

Now, why am I not concerned that COMEX gold took a dip this morning? Early this month gold made my December prediction that it would break $1,570/oz before the Fourth of July. On May 2nd it peaked at $1,577.40 and its been pretty much downhill ever since. This morning we shaved off another $7/oz to trade presently at $1,488.8/oz on better-than-expected news from the labor front.

The Labor Department reported initial unemployment claims decreased by 29,000 to a seasonally adjusted 409,000 in the week ending May 14. Economists had expected only 11,000 less claims so this is encouraging news; the U.S. dollar popped a little and gold price went down. In our present environment gold likes bad headlines, not good ones.

If we suddenly experienced a dramatically improving domestic economy, more jobs and blue skies - gold price could drop a lot further. That's the rub. An economist rule-of-thumb is that our economy adds more jobs than it is sheds once the weekly claims figure falls below 400,000. We're not there yet, pardner.

High unemployment for a sustained time in the U.S. and other developed countries is only one example of how fragile the global economy has become. Pick your poison: oil prices over $100/bbl, re-emerging doubts about European sovereign debt, economic slowdown in China, inflation on the horizon...gold prices are not headed south for long with all these persistent worries. I'll stick my neck out and say we see $1,600/oz gold before Labor Day.

That's my price story but what about value? This report talks frequently about the relative value of gold with respect to key commodities. Our Gold Value Index (GVI) gauges the value of gold in relation to oil, copper and silver independent of currency (see below). 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. Until recently, the GVI has been trending down since 6/7/2010 when it had a value of 100; today it is at 76.84 and it reached a low of 67.89 on 4/11/2010.

This morning one ounce of gold will fetch roughly 360 pounds of copper - this is the same number as last Thanksgiving. When the GVI plumbed a new low in April, an ounce of gold was only worth 325 lbs of the red metal. Gold is gaining value relative to copper.

Looking back to November 2010 is important because it was a time when oil, copper and silver all traded near more historic norms in relation to gold. The closely watched gold/silver ratio stood at 51 on November 26th (the day after Thanksgiving) which is in the 50-56 range we saw before the Bear Sterns collapse and ensuing financial meltdown. Today the gold/silver ratio is 42 up from the low 30s when silver was courting $50/oz in late April. Gold is gaining value relative to silver.

Lastly, this morning's ounce of gold buys 14.9 barrels of NYMEX crude oil; on April 11th it only bought 13.1 barrels, last November it bought 16.3 barrels. Gold has a way to go but it too is gaining value relative to oil.

So what's your point Colonel? Since May 5th COMEX gold has been trading in a range of$1,462/oz to $1,527/oz. This morning we're near the center of that range and may be bouncing along this road until the next scary headline. A rise in dollar price when gold is gaining value against key commodities is not a bad outlook for this report's favorite precious metal. Stay tuned, $1,600/oz here we come.


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 304.27, up from yesterday's 270.16 and below the 1-month moving average of 392.39. The EMI continues to be down from the high set on January 4th and set a new 2011 low May 17th. The 1-month average continues a troubling negative trend.

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 76.84, down from yesterday's 78.13 and above its 1-month average of 74.29. The gold-gaining-value trend is intact. Today's Value Adjusted Gold Price (VAGP) is $1,619.0/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 now above $110/bbl with a large 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 $99.91
ICE North Sea Brent crude $112.47
Spread (ICE- NYMEX) = $12.56 (Yesterday's $12.62 )

Here are the August contracts* with a narrower spread:

NYMEX light sweet crude $100.68
ICE North Sea Brent crude $112.08
Spread (ICE- NYMEX) = $11.40 (Yesterday's $11.47 )

Prices are off their crisis highs but we now have $110+ Brent and $100+ NYMEX in August favoring higher oil prices throughout 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 on very rough roads; The VIX or "fear index" is below 25; bellwether Freeport-McMoRan (FCX) has broke below its 200-day moving average of $49.88 (our new warning level, 05/16 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 The Federal Reserve will phase out buying Treasurys (aka QE2) but maintain low interest rates for now

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

The ORANGE light is turned on our Fuel Gauge with oil above $90

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 0.19 in early trading at $99.91 (June contract, most active); Gold is down $7.0 to $1488.8 (June contract, most active); Silver is up $0.273 to $35.700 (July contract, most active); Copper is down $1.70 at $4.0880 (July contract, most active)

Western Molybdenum Oxide is $16.65; European Molybdenum Oxide is $16.80; LME cash seller is $17.32, LME moly 3-month seller's contract is $17.46

Stock Market Morning Update

The DOW is down 65.62 points to 12,625.80; the S&P 500 is up 5.67 at 1,346.35

Miners are mixed:

Barrick (ABX) $45.68 up 0.73%
Newmont (NEM) $54.04 up 0.45%
US Gold (UXG) $6.76 down 0.29%
General Moly (Eureka Moly, LLC) (GMO) $4.26 up 0.24%
Thompson Creek (TC) $10.73 up 0.85%
Freeport-McMoRan (FCX) $48.44 down 0.37% (a bellwether mining stock spanning copper, gold & molybdenum)

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

ArcelorMittal (MT) $33.48 down 0.59% - global steel producer
POSCO (PKX) $104.97 down 1.34% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is up 0.18% at $1,694,046.77(what's this?).

Cheers,

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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