A Market ROLAIDS® for the Day

ROLAIDS® Spells Fast Relief!


Þūnresdæg
Morning Miners!

It is 6:07 AM. Have a cup of Thor's Market Thunder and a ROLAIDS®. There are enough storms in the markets lately to keep our semi-retired thunder god amused and absent from throwing real thunderbolts around town as he did in May. For that, the ole Colonel is thankful...

Stormy Weather

I'm less thankful for all the stormy weather in the markets. It was more fun keeping track of new record metal prices earlier this year. Records are still around but are not metallic; the U.S. dollar is having its biggest rally in 10-months and the 10-year U.S. Treasury is at its lowest yield (i.e. highest price) for 2011, presently 2.949%.

The broader markets are now open and the S&P 500 is up 0.4% from yesterday's debacle trading at 1,270.38 but the Eureka Miner's Index(EMI) has just set another new low for 2011 with our first sub-200 score for the year (see below). The EMI gives us the market temperature for the factors that have the greatest impact on mining in Eureka County and we're headed for more chilly temperatures, pardner.

A lot of the old gremlins are at work: sovereign debt concerns have resurfaced in Europe as Greeks riot in the streets and their government dissolves and the U.S. economy faces a troubling mix of higher prices and weaker growth. Underlying inflation rose to its highest level in nearly three years in May and U.S. factories are showing signs of contraction.

What's a Colonel to do?

Market ROLAIDS®: Buy Gold and the U.S. Dollar Index


In late April Dennis Gartman, respected author of the Gartman Letter, turned bullish on gold. More recently he has advised folks to guy gold in terms of the euro and the pound sterling anticipating that things are only going to get worse in Europe. In the present environment this strategy gives the investor a little more bang for his buck.

Earlier this month we reported:

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. (Eureka Miner, 6/10/2011)

Last April, I suggested a similar approach that's a little easier to do and avoids direct involvement in forex (currency) markets:

What to do? Here's my idea. I bought equal U.S. dollar amounts of gold (SPDR Gold Trust - GLD) today and the U.S dollar Index (DB US Dollar Index Bullish Fund - UUP) yesterday. This takes some of the sting off buying $1,500/oz gold in today's marketplace. This trade favors gold but gives some protection if things reverse (i.e., Gartman caution on shorting the dollar). We'll watch this combo as the weeks progress. (Eureka Miner, 4/21/2011)

My approach is effectively a "soft short" on the euro and pound sterling since taken together these two currencies comprise 70.5% of the U.S. Dollar Index. Let's see how we are doing so far, here is a hypothetical example of the technique:

Last April:

4/21 buy 10 shares of GLD @$146.74 for $1,467.40
4/20 buy 69 shares of UUP @$21.32 for $1,471.08
Total investment = $2,938.48

At this morning's prices:

10 shares of GLD is valued at $1,483.80 ($148.38/sh.) for a $16.40 profit
69 shares of UUP is valued at $1,493.86 ($21.65/sh.) for a $22.77 profit
Total value = $2,977.65 with a profit of $39.17 or 1.33%

We'll keep track of this trade as the European crisis unfolds, so far so good. The bottom line is that we've made a bit more money than a pure gold investment and have a built-in hedge if the dollar and gold move in opposition. Let's say the U.S. economy is better-than-expected for the second half and the euro doesn't crash. Presumably, the former would strengthen the U.S. dollar but improving conditions in the U.S. and Europe may cause a healthy drop in gold price. For this case, a loss in the gold position is mitigated somewhat by a rise in dollar.

If our own debt problems accelerate, the dollar index could dive but gold would most likely spike. In this event, one's gold profit is reduced by the dollar-side investment. For a long term gold bull, this simple approach takes some of the volatility out of a pure gold investment. If the U.S. dollar actually crashes all bets are off - sell UUP and head for the hills.

That's your market ROLAIDS® for the day. Always do your own research, pardner - these are tricky times.


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 193.35, down from yesterday's 215.88 and below the 1-month moving average of 260.14. The EMI is down from the high of January 4th and sets a new 2011 low at today's 193.35. 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 80.73, up from yesterday's 78.90 and above its 1-month average of 78.55. Today's GVI sets a new high for 2011. Today's Value Adjusted Gold Price (VAGP) is $1,581.2/oz or just $53.2/oz above current 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 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 $95.24
ICE North Sea Brent crude $113.90
Spread (ICE- NYMEX) = $18.66 (Yesterday, $19.66)

Here are the September contracts* with a narrower spread:

NYMEX light sweet crude $96.16
ICE North Sea Brent crude $113.50
Spread (ICE- NYMEX) = $17.34 (Yesterday, $17.40)

* 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 $90+ 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 very rough roads; The VIX or "fear index" is below 25; bellwether Freeport-McMoRan (FCX) is still below its 200-day moving average of $51.15 (our new warning level, 06/13 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 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 $0.43 in early trading at $95.24 (July contract, most active); Gold is up $1.5 to $1527.7 (August contract, most active); Silver is up 0.080 to $35.490 (July contract, most active); Copper is down $0.0555 at $4.0665 (July contract, most active)

Western Molybdenum Oxide is $16.56; European Molybdenum Oxide is $16.45; LME cash seller is $16.56, LME moly 3-month seller's contract is $16.56

Stock Market Morning Update

The DOW is up 56.68 points to 11,953.95; the S&P 500 is up 4.96 at 1,270.38

Miners are mixed:

Barrick (ABX) $43.39 down 1.23%
Newmont (NEM) $51.89 down 0.80%
US Gold (UXG) $5.75 down 1.88%
General Moly (Eureka Moly, LLC) (GMO) $4.33 up 0.93%
Thompson Creek (TC) $9.60 down 0.31%
Freeport-McMoRan (FCX) $47.97 down 1.15% (a bellwether mining stock spanning copper, gold & molybdenum)
Quadra FNX (TSE:QUX) $13.37 down 0.90%

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

ArcelorMittal (MT) $31.58 up 0.29% - global steel producer
POSCO (PKX) $96.00 down 1.50% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is down 0.62% at $1,599,010.23 (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