"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.

Friday, June 24, 2011

Gold Price Down, Gold Value Up; Moly Goes on Watch

Morning Miners!

It is 5:45 AM. Have a cup of Raine's delicious Red Label and be glad we're near the finish line. With all this week's market turbulence there are a few encouraging signs for gold, fewer for molybdenum...

Gold Price Down, Gold Value Up

Monday we noted that gold has dramatically gained value against some key commodities after an 11-month decline. This report's Gold Value Index (GVI) made a new high for the year on Monday and another yesterday. The GVI gauges the value of gold in relation to oil, copper and silver independent of currency. In simple terms an ounce of gold now buys more barrels of oil, pounds of copper and ounces of silver than it did just several months ago (see below).

This morning COMEX gold is down about $20/oz from where it was this time Monday morning; $1,519.4/oz versus $1,539.2/oz. Although gold is down in price it has maintained relative value; a GVI of 81.7 versus 82.2.

An ounce of gold this morning buys...

26.4% more barrels of oil than on April 8th (2011 GVI oil high)
28.1% more pounds of copper than on February 7th (2011 GVI copper high)
37.3% more ounces of silver than on April 25th (2011 GVI silver high)

Falling dollar price, steady relative value with a valuation close to the new high for 2011; not all bad for our favorite precious metal.

What does it all mean? Miners like Barrick Gold should be happy that the cost of fuel in terms of their primary product is a lot cheaper than in early spring. This helps maintain profit margins even if gold dollar price falls further.

For copper and silver, we are seeing prices return to more normal levels with respect to gold. This report's Value Adjusted Gold Price (VAGP) is a computed price that supports current oil, copper & oil prices based on historical commodity norms. This morning the VAGP is $1,553.5/oz only $34.1/oz above COMEX gold at $1,519.4/oz. On April 11th this difference peaked at an amazing $344.7/oz.

The dramatic convergence of the VAGP and current gold price implies that metal prices inflated by monetary easing are showing signs of stabilization as Central Banks remove stimulus from the global economy. A good example is the Federal Reserve's decision to end the second phase of quantitative easing this month. Keep an eye on the GVI and VAGP; gold is still your friend and final arbitrator of price - it's been that way for more than 5,000 years!

Molybdenum Watch

This morning the Report is putting molybdenum on price watch as western spot prices dropped to the low-$15 level yesterday at $15.08/lb. Here is a 3-month chart:

Last Wednesday, the ole Colonel had a hunch that moly pricing was setting up for the downside. We reported a subtle shift in molybdenum markets when Western moly oxide on the spot market found itself above the London Metal Exchange (LME) 3-month seller's contract in price. Although the difference was small this so-called "backwardation" was a condition we have not seen for some time. Spot prices typically trade below future price expectations or in "contango" with the futures contracts.

Here is yesterday's lineup:

Western moly oxide $15.08/lb
European Moly Oxide $15.25/lb
LME cash seller $15.51/lb
LME 3-month seller $15.51

We are now below $16/lb across the board and more ominously the 3-month seller remains below my 2010 moly price taget of $15.71/lb. The orange light is turned ON for Miss Moly (see the Eureka Outlook Dashboard 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 222.31, up from yesterday's 196.96 and below the 1-month moving average of 248.35. The EMI is down from the high of January 4th and set a new 2011 low on June 20th at 183.47. 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 hot and cold markets 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 81.72, down from yesterday's 82.20 and above its 1-month average of 79.46. The new high for 2011 is 82.20 set June 23rd. Today's Value Adjusted Gold Price (VAGP) is $1,553.5/oz or just $34.1/oz above the current COMEX gold price.

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 trended down since 6/7/2010 when it had a value of 100; recently, gold has been gaining value reversing the trend. These three commodities were chosen for relative value comparison because 1) oil is a common cost element for all miners, 2) copper has proven to be 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 $100/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 $91.33
ICE North Sea Brent crude $106.56
Spread (ICE- NYMEX) = $15.23 (Yesterday, $17.66)

Here are the October contracts* with a narrower spread:

NYMEX light sweet crude $92.53
ICE North Sea Brent crude $108.8
Spread (ICE- NYMEX) = $14.72 (Yesterday, $16.27)

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

Prices are off their crisis highs but we still have $100+ Brent and $90+ NYMEX in October favoring high oil prices throughout the summer and into fall although there is now downward pressure on oil prices. 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) is still below its 200-day moving average of $51.44 (our new warning level, 06/20 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 more investors avoid commodity-sensitive equities

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 up $0.31 in early trading at $91.33 (August contract, most active); Gold is down $1.1 to $1519.4 (August contract, most active); Silver is down $0.137 to $34.865 (July contract, most active); Copper is up $0.0840 at $4.1230 (July contract, most active)

Western Molybdenum Oxide is $15.08; European Molybdenum Oxide is $15.25; LME cash seller is $15.51, LME moly 3-month seller's contract is $15.51

Stock Market Morning Update

The DOW is down 42.31 points to 12,007.69; the S&P 500 is down 3.46 at 1,280.04

Miners are mixed:

Barrick (ABX) $43.76 down 0.52%
Newmont (NEM) $53.83 down 0.28%
US Gold (UXG) $5.86 down 0.34%
General Moly (Eureka Moly, LLC) (GMO) $4.37 up 1.39%
Thompson Creek (TC) $9.63 down 0.10%
Freeport-McMoRan (FCX) $49.18 up 0.49% (a bellwether mining stock spanning copper, gold & molybdenum)
Quadra FNX (TSE:QUX) $13.79 up 0.97%

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

ArcelorMittal (MT) $32.30 up 0.25% - global steel producer
POSCO (PKX) $105.05 up 3.33% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is down 2.52% at $1,630,300.09 (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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