$1,782.50 Gold; Silver Raises a Warning Flag

Silver goes "BOING" to the downside

My latest Kitco Commentary: Is Gold Overvalued? (08/08/2011)


Morning Miners!

It is 5:42 AM. Have a cup of Tuesday Joe. Sweet Ruby T is not only the break room's market bull - she is our resident onomatopoeic neologist. Ruby's word for the day is "derrerrerrduhhduhduhh" which imitates the sound of her Peterbilt truck when she hits the jake brake on the backside of Pinto Summit. Ruby explains that her engine break neologism means "markets in the tank."

Yesterday, stocks saw their biggest one-day drop since December 2008 during the depths of the global financial crisis. That month was arguably the worst for the metals & miners - if the Eureka Miner's Index(EMI) existed then it would have scored 1.2 in early December 2008. On January 4th of this year the EMI was 816.8, keep those two numbers in mind and we'll see how we fare today (EMI update below). Ruby is in the house so we'll probably see a bounce...

$1,782.50 Gold; Silver stalls

COMEX gold pegged another ringer at $1,782.5/oz in the early hours (05:20:00, December contract most active) but COMEX silver is struggling to find her groove. Presently gold has pulled back to $1,744.4/oz but is still up $31.2 from yesterday's close. COMEX silver is trading at $37.930/oz down $1.450 signalling that there is a shift in the thinking of precious metal investors.

The closely watched gold:silver ratio is now 46.0 breaking out of the 39-45 range it has been in since May 5th. There are two possible and potentially related reasons for this. The first is that silver has significant industrial use as well as a safe-haven role in times of trouble. The former may be providing headwind with new uncertainty about the health of global recovery. Secondly, the gold:silver ratio is a fair gauge for "hyper-fear" in the markets. As the 2008 financial crisis worsened the ratio blew up to 75 after the collapse of Lehman Brothers (9/08) and peaked around 85 when folks feared a run on the banks beginning that October. Prior to Bear Stearns going down, the ratio was in a historically more normal range of 50-56.

Remember, in a liquidity squeeze silver is often the first treasure thrown overboard by hedge fund captains on sinking ships.

Today's ratio break to the upside may be either a trend to more historical norms (50ish) or the beginning of a trajectory to much higher numbers if the markets accelerate to the downside. The gold:silver warning flag is one to watch, pardner.

COMEX copper has also dropped below the key-$4/lb level which is potentially another warning sign, we'll talk about that tomorrow. Thankfully, COMEX copper is presently trading up $0.0250 at $3.9865/lb.

The broader markets are now open and it looks like Ruby is right, they are headed up.


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 74.53, down from yesterday's 92.78 and below the 1-month moving average of 248.31. The EMI is down from the high of January 4th and sets a new 2011 low today at 74.53. 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 barely below-par at 98.94, up from yesterday's 93.58 and well above its 1-month average of 82.18. This is another new high for 2011 breaking above the old record of 93.58 set August 8th. Today's Value Adjusted Gold Price (VAGP) is $1,473.1/oz or a startling $271.3/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. It is showing signs of being a little "toppy."

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 272.1 up from yesterday's 224.0. 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 dangerously 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 $81.33
ICE North Sea Brent crude $103.87
Spread (ICE- NYMEX) = $22.54 (Yesterday, $22.49)

Here are the November contracts* with a narrower spread:

NYMEX light sweet crude $82.20
ICE North Sea Brent crude $104.05
Spread (ICE- NYMEX) = $21.85 (Yesterday, $21.82)

* 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 up $0.02 in early trading at $81.33 (September contract, most active); Gold is up $31.2 to $1744.4 (December contract, most active); Silver is down $1.450 to $37.930 (September contract, most active); Copper is up $0.0250 at $3.9865 (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 up 129.87 points to 10,939.72; the S&P 500 is up 17.17 points at 1,136.63

Miners are on their feet:

Barrick (ABX) $47.06 up 1.99%
Newmont (NEM) $55.17 up 1.92%
US Gold (UXG) $5.50 down 1.10%
General Moly (Eureka Moly, LLC) (GMO) $3.52 up 0.28%
Thompson Creek (TC) $7.54 up 6.80%
Freeport-McMoRan (FCX) $43.01 up 2.67% (a bellwether mining stock spanning copper, gold & molybdenum)
Quadra FNX (TSE:QUX) $12.07 up 3.72%
Timberline Resources (TLR) $0.75 up 4.17%

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

ArcelorMittal (MT) $22.85 up 2.97% - global steel producer
POSCO (PKX) $95.06 up 0.68% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is up 1.16% at $1,552,758.37 (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 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