Gold Down, Elko Expo Up - Buy Gold?

Morning Miners!

It is 6:02 AM. Have a welcome cup of Raine's Golden Friday. Somebody is happy about gold - maybe you should be happy too...


Gold, Silver, Copper Drop

COMEX gold and silver held hands and took a lover's leap at 8:20 AM ET. After a 50-minute fall gold was down $15.7 at $1,526.70/oz or 1.0%; silver was down $0.91 at $36.460/oz or 2.4%. Both have come up for a gasp of air, now trading at $1,530.50/oz and $36.740/oz respectively. Spot copper dropped more than a percent this morning too; COMEX copper is presently holding above $4/lb at $4.0560/lb down 1.25%. Nuts.

Pretty rough way to start a morning or is it? I couldn't make it this year but Mining Editor Adella Harding reported last night that there are lots of happy gold miners at the annual Elko Mining Expo:

Mood upbeat at Elko Mining Expo (Adella Harding, Elko Daily Free Press, 6/9/2011)

She begins the article by quoting Elko Mining Expo volunteer Jackie Williams, "Everybody is smiling when gold is up." Hey, the ole Colonel can't argue with that - gold IS above $1,500/oz and I'm sticking with my prediction that we'll see $1,600/oz before Labor Day. Apparently, visitors pouring into the sold-out Expo are feeling pretty upbeat too.

Buy Gold?

Dennis Gartman, "Commodity King" and author of the respected Gartman Letter, is feeling pretty chipper about glitter too - at least in euro or pound sterling terms. Kitco News carried one of their Market Nuggets on the Commodity King's latest thoughts, "we no longer consider gold to be a commodity, but is instead a currency and we are recommending strongly that our long gold positions be ratcheted up...we are about to turn violently bearish" of the euro and "all things European" (do a little digging on the Market Nuggets link, they update frequently).

Hmm, that's pretty strong talk, pardner. The U.S. dollar is getting a much needed lift on a falling euro this morning. According to Gartman, currency investors are presently more skittish about the European than United States debt problems. I heard Gartman on CNBC Business News the other day predict that the euro will fall from $1.45 pasture to $1.35 hard scrabble in the near term, it won't break my heart.

When Gartman says he is buying gold in euro or pound terms he is actually buying U.S. dollar gold in an exchange traded fund like the SPDR Gold Trust (GLD) and then shorting the euro and/or pound sterling. This is clever but probably a little tricky for the average investor. Here is how he explains the approach if one were to buy gold in terms of the Japanese yen:

"The position has to be created; that is, one has to buy gold in U.S. dollar terms and then one has to sell the yen against the dollar, leaving one long of gold in yen terms. This can be done in any number of ways, the simplest being to own gold in the form of the gold ETF and then selling spot yen short on the forex market or selling it short on the IMM futures market. The difficulty in the trade is making certain that one has equal sums of dollars on the long and the short side so that one has the trade done in proper dollar equivalency. Or more simply put, if one is long of gold futures and short of yen futures, in the proper sizes, one has bought gold in yen terms. Even broking firms adamantly opposed to trading futures will allow this sort of trade to be done, but will they do it for you? No, you have to do it yourself." (Dennis Gartman)

The Colonel's less effective but simpler approach is to buy the U.S. Dollar Index (e.g., PowerShares DB US Dollar Index Bullish Fund - UUP) which is essentially a "soft short" on the euro and pound sterling (taken together these two currencies comprise 70.5% of the index, see note 2). The advantage is that UUP is also an exchange traded fund like GLD and you don't need a forex account to do currency trades. The risk is that the index does include other currencies like the yen and Swiss franc that may corrupt the purity of the Gartman approach. Good enough for ranch work from where I sit.

"My heads starting to hurt, Colonel! What's your dad blame point?"

Since I already have lots of UUP (perhaps, too much), the ole Colonel decided to buy a little more GLD this morning to balance things up a bit. I don't like to ignore Gartman, especially on a day when gold is pulling back on a strengthening dollar. Now are you a bit more happy?

Please do your own thinking on this one, the Colonel has taken a few wrong turns in the gold/currency forest before.


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 230.59, down from yesterday's 239.47 and below the 1-month moving average of 271.45; the lower trend line is 215.01. The EMI is down from the high of January 4th but above the 2011 low of 223.22 set 6/8/2011. The 1-month moving average continues a troubling downtrend.

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 78.66, up from yesterday's 78.49 and above its 1-month average of 78.32. The gold-gaining-value trend has stalled. Today's Value Adjusted Gold Price (VAGP) is $1,625.7/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 $100.20
ICE North Sea Brent crude $119.05
Spread (ICE- NYMEX) = $18.85 (Yesterday, $16.58)

Here are the September contracts* with a narrower spread:

NYMEX light sweet crude $101.21
ICE North Sea Brent crude $117.98
Spread (ICE- NYMEX) = $16.77 (Yesterday, $15.18)

* NYMEX futures contracts have rolled forward, we now show July & September for a 2-month look-ahead

Prices are off their crisis highs but we still have $110+ Brent and $100+ NYMEX in September favoring high 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 rough roads; The VIX or "fear index" is below 25; bellwether Freeport-McMoRan (FCX) is still below its 200-day moving average of $50.92 (our new warning level, 06/08 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 in June (aka QE2) but maintain low interest rates for now

The YELLOW light is turned back on for Investor Confidence as some investors avoid commodity-sensitive equities

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 $1.73 in early trading at $100.20 (July contract, most active); Gold is down $12.2 to $1530.5 (August contract, most active); Silver is down 40.684 to $36.740 (July contract, most active); Copper is down $0.0515 at $4.0560 (July contract, most active)

Western Molybdenum Oxide is $16.42; European Molybdenum Oxide is $16.60; LME cash seller is $16.87, LME moly 3-month seller's contract is $17.01

Stock Market Morning Update

The DOW is down 97.11 points to 12,027.25; the S&P 500 is down 10.00 at 1,279.00

Miners are down:

Barrick (ABX) $44.05 down 0.77%
Newmont (NEM) $52.60 down 0.60%
US Gold (UXG) $5.80 down 1.86%
General Moly (Eureka Moly, LLC) (GMO) $4.38 down 0.45%
Thompson Creek (TC) $9.67 down 2.03%
Freeport-McMoRan (FCX) $49.78 down 0.14% (a bellwether mining stock spanning copper, gold & molybdenum)
Quadra FNX (TSE:QUX) $14.07 down 0.36%

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

ArcelorMittal (MT) $32.88 up 0.43% - global steel producer
POSCO (PKX) $100.39 down 1.04% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is down 0.98% at $1,637,472.88 (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)

Note 2 - The US Dollar Index (USDX) is an index (or measure) of the value of the United States dollar relative to a basket of foreign currencies.

It is a weighted geometric mean of the dollar's value compared only with

* Euro (EUR), 58.6% weight
* Japanese Yen (JPY) 12.6% weight
* Pound sterling (GBP), 11.9% weight
* Canadian dollar (CAD), 9.1% weight
* Swedish krona (SEK), 4.2% weight and
* Swiss franc (CHF) 3.6% weight

(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