"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, August 4, 2011

$1,684.70 Gold; Dollar Bounce; "It's Not Your Daddy's Gold Anymore"

The Eureka Palisade RR Depot of yore

*** BREAKING NEWS *** Major sell-off today of the broader markets with the DOW shedding 512.76 points to close at 11,383.60, down 4.31%. The S&P 500 closed slightly below its 400-day moving average at levels not seen since December 1st 2010; 1,200.7 down 60.27 points or 4.78%. Gold and silver prices were hit hard by liquidations trading at 1,653.7/0z and $38.735/oz respectively as the broader markets closed.

*** BREAKING NEWS - COMEX gold just added 20-cents to best its morning record hitting $1,684.90/oz 10:50 EDT. Liquidations may now be dropping gold price in a market "race for liquidity". Presently gold is trading at $1,660/oz (10:15 AM PDT)

Morning Miners!

It is 5:49 AM. Have a cup of Thor's delicious Jörmungandr Java. The ole serpent slayer has been on his best behavior lately, there has been enough drama in the break room between our market bull and bear. Ruby T is recovering from an extracted tooth and Old Miner Woden has trekked back to Lone Mountain to search for gold. It has been a real toothache for optimists lately; Woden cannot contain his glee...

$1,684.70 Gold; Dollar Bounce

Gold records have been resetting to new highs ever since the ole Colonel stumbled out of bed. The last tick up got us to $1,684.70/oz at 10:00 EDT on the COMEX. Silver put in its intraday high 10 minutes earlier at $42.295/oz. Comparing these two highs, the closely watched gold:silver ratio has broken below 40 at 39.83.

A COMEX gold trader just remarked on CNBC Business News, "It's not your daddy's gold anymore!" He sees resistance in the $1,685 to $1,700/oz area, the latter being an important "psychological" level. The ole Colonel predicted that COMEX gold would take out $1,700/oz in my last Kitco commentary ($1,700+ Gold and a New Copper High by Year's End). The race is on.

Surprisingly, all this precious metal action is occurring while a U.S. dollar rises against almost all other global currencies. The U.S. dollar index is back above the 75-level ringing in a 75.06, up more than 1.5%. Two things to note: 1) somewhat atypically, gold price and the dollar are moving together (see note 3), and 2)anything approaching a one percent-in-a-day price move is generally perceived as huge in the currency world. What's going on?

A lot of central bank interventions is the correct answer. The ECB is buying the government bonds of Ireland and Portugal, the first such intervention since March. Additionally, ECB President Jean-Claude Trichet announced that it would offer a six-month tender of unlimited size next week. Japan is trying to weaken a yen on steroids (the yen has bounced from 77.06 yesterday to 79.0 today - higher number weaker yen. The last intervention occurred at the 83-level to give this some perspective). The Swiss are attempting to indirectly weaken their franc by dropping interest rates (the Swiss franc has been the safe-haven favorite of currency traders lately).

In the meantime, NYMEX oil has fallen all the way down to $91.48/bbl - territory we have not seen in some time and copper has broken below $9,500/metric ton ($4.3092/lb), a key technical level as identified by the London Metal Exchange (LME). COMEX copper is presently at $4.2955/lb; I'll start worrying if it falls below the $4.25/lb mark. The ole Colonel predicted that copper will remain above $4/lb this summer, nervous money money on that bet with days like this.

My one market wish is that world governments observe a one-year moratorium on any further interventions!

The broader markets are now open and it looks like the S&P 500 is headed down the mineshaft; presently 1,240.13, down 1.65%. The only thing that is keeping the Eureka Miner's Index(EMI) from setting a new 2011 low this morning is the drop in oil. Mining stocks are being bludgeoned. Nuts.

What to do? I'm buying the stock market through the SPDR S&P 500 Trust Exchange Traded Fund (SPY) - how's that for a little optimism. Sweet Ruby T will give the ole Colonel a squeeze for that bet! The SPY presently pays a 1.93% dividend yield, better than bank CDs, pardner.

Please do your own research - the Colonel could be dead wrong.

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 186.24, down from yesterday's 212.20 and below the 1-month moving average of 279.86. The EMI is down from the high of January 4th and set a new 2011 low on June 27th at 180.03. The 1-month moving average broke its troubling downtrend on July 5th, trended up for awhile but is now trending back down.

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 86.02, up from yesterday's 84.62 and above its 1-month average of 79.98. This is another new high for 2011 breaking above the old record of 84.62 set August 3rd. Today's Value Adjusted Gold Price (VAGP) is $1,630.2/oz or $48.1/oz below the current COMEX gold price.

Although gold prices have been on the rise, the GVI has trended down since 6/7/2010 when it had a value of 100; gold regained value recently reversing the trend, moved sideways for a time and and is heading back up with vigor.

The GVI gauges the value of gold in relation to oil, copper and silver independent of currency. 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 and industrial 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 Debt Crisis Watch

July 26th we introduced the Debt Crisis (DCI) Index to track the debt squabble in Washington and its impact on the bond, equity, currency and commodity markets. The Report will now carry it forward to track the bigger picture of domestic and global sovereign debt worries (note 2).

The DCI is computed in the mornings and at the market close Friday in much the same way we do the EMI & GVI indices. Today, the DCI has a value of 143.6 up from yestrday morning's 133.4. Our benchmark is 100, the value of the DCI on July 22nd; a bigger number suggests a worsening impact on markets (note 2). This Report has identified an elevated level surpassing 200 is time for serious concern.

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 $91.48
ICE North Sea Brent crude $112.06
Spread (ICE- NYMEX) = $20.58 (Yesterday, $21.89)

Here are the November contracts* with a narrower spread:

NYMEX light sweet crude $92.25
ICE North Sea Brent crude $111.99
Spread (ICE- NYMEX) = $19.74 (Yesterday, $20.70)

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

Prices are off their crisis highs and we have $110+ Brent and $90+ NYMEX in November favoring high oil prices throughout the summer and into late fall although there are now signs of weakening 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 back on rough roads; The VIX or "fear index" is above 25; in early morning trading, bellwether Freeport-McMoRan (FCX) is below its 200-day moving average of $52.88 and 150-day moving average of $53.29 (our new key levels, 07/28 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 phased out buying Treasurys June 30th (aka QE2) but will maintain low interest rates for now

The ORANGE light is turned back on for Investor Confidence with investors adverse to 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 down $0.45 in early trading at $91.48 (September contract, most active); Gold is up $12.0 to $1678.3 (December contract, most active); Silver is up $0.357 to $42.115 (September contract, most active); Copper is down $0.0305 at $4.2955 (September contract, most active)

Western Molybdenum Oxide (Infomine) is $14.97; European Molybdenum Oxide (Bloomberg) is $14.70; LME cash seller is $14.97, LME moly 3-month seller's contract is $14.97

Stock Market Morning Update

The DOW is down 158.30 points to 11,738.14; the S&P 500 is down 20.21 points at 1,240.13

Miners are in the shaft:

Barrick (ABX) $48.74 down 0.77%
Newmont (NEM) $57.01 down 0.19%
US Gold (UXG) $6.43 down 3.74%
General Moly (Eureka Moly, LLC) (GMO) $4.20 down 5.41%
Thompson Creek (TC) $8.535 down 3.83%
Freeport-McMoRan (FCX) $48.82 down 3.61% (a bellwether mining stock spanning copper, gold & molybdenum)
Quadra FNX (TSE:QUX) $14.68 down 3.26%
Timberline Resources (TLR) $0.75 down 1.32%

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

ArcelorMittal (MT) $26.29 down 7.07% - global steel producer
POSCO (PKX) $105.60 down 2.20% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is down 2.18% at $1,688,392.70 (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)

Note 2 - The impact of the U.S. debt ceiling debate affected investment decisions for weeks before its resolution August 2nd. The quality of U.S. fiscal plans going forward will determine if there is a credit downgrade in the wings. Global sovereign debt issues have been an overhang on markets for many, many months starting with the Dubai crisis in late November, 2009 and spreading to the euro-zone in 2010-2011.

Note 3 - Gold price and the U.S. dollar typically move in opposition unless they are both perceived as safe-haven plays. Lately, the Swiss franc has been the safe-haven choice among currency traders as the dollar falls and gold rises. Today this currency relation has flipped its relation with gold.

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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