"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.

Monday, August 8, 2011

$1,718.20/oz Gold - "Don't Just Do Something, Stand There!"

Like a rock...

*** BREAKING NEWS *** COMEX gold broke $1,722.40/oz moments ago (10:45 AM PDT, December contract most active)

*** BREAKING NEWS *** COMEX gold broke $1,721.90/oz moments ago (9:50 AM PDT, December contract most active)

Morning Miners!

It is 5:34 AM. Have a cup of Kevlar Koffee, you may need a little bullet-proof protection. Due to the expected market upheaval today, the Report is suspending its Weekly Metals & Miners Roundup again to focus on some key developments...

$1,718.20/oz Gold

This is one of those mornings that I don't get much pleasure for being right. In my July 28th Kitco News commentary, the ole Colonel predicted gold would break $1,700/oz before year's end. Sunday traders blew past this level and COMEX gold touched $1,718.20/oz in the wee hours of Monday morning (01:30 AM EDT; December contract most active). That's more than a $60 jump from Friday's close which is a little scary. Often when a move is this dramatic in a commodity price, a cruel reversal may be in the wings. We'll just have to wait and see, there is certainly enough uncertainty surrounding the U.S. credit downgrade and deteriorating European debt crisis to support future price upswings even if this rally ends with consolidation of correction.

COMEX gold has settled down some at $1,700.1/oz and COMEX silver is sitting at $39.410/oz. The closely watched gold:silver ratio is 43.14 roughly in middle of the 39-45 range where its been since early May. Simply stated, silver is running with gold but we haven't seen the "out performance" of the white metal earlier this year when the ratio closed in on the 30 level.

Here is what spot gold prices looked like in London:

"Don't Just Do Something, Stand There!"

John C. Bogle of Bogle Investment Management was on CNBC's Business News Squawk Box early morning show. He offered some advice to worried investors in times of market crisis, "Don't just do something, stand there!" He is a wise man. It seems as though the towers are tumbling again as in 2008 but those that held their ground then did well when the markets recovered. There are growing numbers of big gorillas in the room: the global concern over the U.S and Europe debt debacle; the threat of double-dip recession for the western economies and even fear that China may be heading for recession.

Today Europe problems may be trumping the U.S. debt downgrade since the U.S. dollar is up and folks are still pouring into U.S. Treasuries (10-year yield is presently 2.466%; lower yield higher price). Ironically, the super-low rates are actually fueling some of the gold surge; higher rates typically make government bonds more appealing than gold as a safe haven investment because gold produces no income. This morning it looks like investors are going to both.

The broader markets are now open and it looks like we are extending last week's carnage. This report's Debt Crisis Index (DCI) is presently at 224.4. Anything above the 200-level is time for serious market concern (see below).

The Eureka Miner's Index(EMI) drops below the 100-mark

The Eureka Miner's Index(EMI) set a new low for 2011 last Friday just above the 100-mark at 107.7. This morning the EMI takes us below par for the first time since August 25th 2010. Here is the EMI chart as of last Friday:

An EMI of 100 is the boundary between hot and cold markets for the metals & miners (see below). Nuts.

Gold Value Soars with Prices

Holders of gold will be pleased that gold prices have risen so dramatically in currency price and value relative to key commodities. Here is the Friday chart or this Report's Gold Value Index (GVI):

This morning the GVI jumped another leg to 93.6 nearly reaching par; the 100-level of June 7th 2010 when the DOW closed below the "Flash Crash" low recorded a month earlier. The ole Colonel will be posting a commentary on this remarkable rise in value this week on the Kitco News site. Today's action is explained further in the Daily Roundup below.

Hold on to your gold, pardner.

Mt. Hope Water Rights Update

Mining editor Adella Harding of the provides a good summary of the ongoing Mt. Hope water rights issue in last Friday's Elko Daily Free Press:

Eureka County affirms water-rights appeal (Adella Harding, Elko Daily Free Press, 8/5/2011)

According to Adella, "Eureka County Commissioners voted Friday to file an appeal over water rights for the proposed Mt. Hope molybdenum mine, but they also plan to take another look at the appeal next month."

The Colonel presently has no further insight regarding the Commissioners' decisions; General Moly (GMO) is presently trading at $3.67 down an alarming 8.02%. Stay tuned.

Daily Market Roundup

Enough talk, let's walk the walk:

Eureka Miner's Index(EMI)

This morning the Eureka Miner's Index(EMI) is below-par at 92.78, down from Friday's 107.65 and below the 1-month moving average of 260.70. The EMI is down from the high of January 4th and sets a new 2011 low today at 92.78. The 1-month moving average broke its troubling downtrend on July 5th, trended up for awhile but is now dangerously trending down. Dropping below the 100-mark is a very bearish development.

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)

The Gold Value Index (GVI) is below-par at 93.58, up from Friday's 89.52 and above its 1-month average of 81.24. This is another new high for 2011 breaking above the old record of 89.52 set August 5th. Today's Value Adjusted Gold Price (VAGP) is $1,518.1/oz or $182.0/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 224.0 up from Friday's 196.8. 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. We are now above that level.

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 $83.71
ICE North Sea Brent crude $106.20
Spread (ICE- NYMEX) = $22.49 (Yesterday, $21.74)

Here are the November contracts* with a narrower spread:

NYMEX light sweet crude $84.57
ICE North Sea Brent crude $106.39
Spread (ICE- NYMEX) = $21.82 (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 $100+ Brent and $80+ NYMEX in November favoring high oil prices throughout the summer and into late fall although there are now definite 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 very rough roads; The VIX or "fear index" is above 25; in early morning trading, bellwether Freeport-McMoRan (FCX) is seriously below its 200-day moving average of $52.93 (our new key level, 08/05 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 YELLOW light is turned on for Stable Markets with the VIX above 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 YELLOW light is turned on our Fuel Gauge with oil above $80

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 $3.17 in early trading at $83.71 (September contract, most active); Gold is up $58.3 to $1700.1 (December contract, most active); Silver is up $1.199 to $39.410 (September contract, most active); Copper is down $0.0170 at $4.1000 (September contract, most active)

Western Molybdenum Oxide (Infomine) is $14.97; European Molybdenum Oxide (Bloomberg) is $14.75; LME cash seller is $14.97, LME moly 3-month seller's contract is $14.97

Stock Market Morning Update

The DOW is down 29.67 points to 11,354.01; the S&P 500 is down 6.98 points at 1,193.09

Miners are mixed:

Barrick (ABX) $46.04 up 0.39%
Newmont (NEM) $55.81 up 2.57%
US Gold (UXG) $5.70 down 0.70%
General Moly (Eureka Moly, LLC) (GMO) $3.67 down 8.02%
Thompson Creek (TC) $7.48 down 2.86%
Freeport-McMoRan (FCX) $44.55 down 3.13% (a bellwether mining stock spanning copper, gold & molybdenum)
Quadra FNX (TSE:QUX) $12.41 down 5.19%
Timberline Resources (TLR) $0.69 up 1.47%

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

ArcelorMittal (MT) $23.57 down 7.64% - global steel producer
POSCO (PKX) $98.56 down 3.62% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is down 1.77% at $1,552,819.93 (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.

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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