Thursday, August 18, 2011
$1,821.8/oz Gold & The Colonel's Greatest Fear
My latest Kitco Commentary: Is Gold Overvalued? (08/08/2011)
*** BREAKING NEWS *** COMEX gold broke $1,829.70/oz (10:10 AM EDT, 12/11 contract most active)
It is 5:24 AM. Have a cup of Thor's Day Tremors. It's a long way to Halloween but that semi-retired thunder god has got the ole Colonel spooked...
The Colonel's Greatest Fear
My greatest fear is not mice, I have cats; or highway bandits, I have a ferocious Chihuahua. No pardner, my greatest fear is waking up some morning to find a European bank has failed. We may have our share of woes in the United States but the ticking time bomb is presently in Europe. Global markets were in the tank this morning long before domestic jobs and inflation data were released, all eyes are on worsening sovereign debt issues in Europe.
COMEX gold did break last Thursday's record shortly after a lousy jobless claims and inflation numbers hit the wires. At 8:40 AM gold touched $1,821.80/oz and it has fallen back some to a respectable $1,820.6/oz. COMEX silver went along for the ride trading now at $40.635/oz with the the gold:silver ratio hanging in at 44.8 in the 44-46 range since August 8th when things started to get ugly.
New jobless claims rose above 400,000 last week, the latest sign of a continued weak U.S. labor market. Most economists agree that claims need to drop below that level for the economy to add jobs - instead, initial jobless claims rose by 9,000 to a seasonally adjusted 408,000. Consumer inflation resumed its rise as gasoline prices rebounded and food costs continued to go up. Consumer prices rose 0.5% from June, the largest monthly increase since March. Underlying inflation, which excludes energy and food costs, rose by a monthly 0.2% in July, in line with expectations. On an annualized basis, consumer prices were up by 3.6% in July, above the Federal Reserve's target. Nuts.
I grow nervous but not fearful that oil and copper are still out of whack with gold. A gold:oil ratio above 20 and a gold:copper ratio above 400 are further evidence of troubled markets. The former is presently at 21.36; the later, is 457. The 3-month averages are historically more typical at 16.8 and 378 but are climbing higher every day as more fear is priced in the market. Currently oil is trading down $2.36 at $85.22/bbl and the red metal is down $0.9850 at $3.9850/lb.
The broader markets have opened and it looks like a bruiser. The DOW is down a whopping 466.1 points at 10,944.1; the S&P 500 is down 52.32 points at 1,141.57.
When gold and copper prices move in opposition more often than not, they become negatively correlated and the gold:copper ratio diverges (as we noted above). A striking picture of this situation is a plot of the 3-month versus 1-month correlations of gold and copper through yesterday's close:
Starting May 2nd, gold and copper were stuck in negative 3-month correlation (blue line). From July 5th to August 1st life was good as gold and copper got back together and soared to high positive correlation (magenta line, prices moving together). The blue diamond is November 26th 2010, another time of high positive correlation.
As this month progressed the correlation trajectory fell to earth like a crashing airplane (magenta line, prices moving apart). Gold and copper are now in deep inversion (by my definition, when both 1-month and 3-month correlations are negative), a very bearish sign. Gold and oil have the same negative relation. Here are the latest data:
gold:copper correlation -0.8817 (1-month) -0.6990 (3-month)
gold:oil correlation -0.9485 (1-month) -0.1165 (3-month)
Metals and miners do best when these correlations are all positive - no bulls in this pasture, pardner.
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 85.93, down from yesterday's 121.95 and below the 1-month moving average of 186.27. The EMI is down from the high of January 4th and set a new 2011 low of 74.53 on August 9th. The 1-month moving average broke its troubling downtrend on July 5th, trended up for awhile but is now dangerously trending down. Falling below the 100-mark last is a 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 just below par at 99.79, up from yesterday's 95.90 and well above its 1-month average of 87.92. A new high for 2011 of 100.70 was set August 10th. Today's Value Adjusted Gold Price (VAGP) is $1,524.4/oz or $296.2/oz below the current COMEX gold price.
Although gold prices were on the rise, the GVI 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 headed back up with vigor. It is showing signs of being a little "toppy" now that it is close to 100 again.
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 derivatives are 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 228.4 up from yesterday's 184.0. 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 $85.22
ICE North Sea Brent crude $85.73
Spread (ICE- NYMEX) = $23.36 (yesterday, $22.92)
Here are the November contracts* with a narrower spread:
NYMEX light sweet crude $85.73
ICE North Sea Brent crude $108.31
Spread (ICE- NYMEX) = $22.58 (yesterday, $22.17)
* 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 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 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 until mid-2013
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 $2.36 in early trading at $85.22 (September contract, most active); Gold is up $26.8 to $1820.6 (December contract, most active); Silver is up $0.284 to $40.635 (September contract, most active); Copper is down $0.0470 at $3.9580 (September contract, most active)
Western Molybdenum Oxide (Infomine) is $14.97; European Molybdenum Oxide (Bloomberg) is $14.80; LME cash seller is $14.97, LME moly 3-month seller's contract is $14.97
Stock Market Morning Update
The DOW is down 466.10 points to 10,944.11; the S&P 500 is down 52.32 points at 1,141.57
Miners are unhappy:
Barrick (ABX) $49.99 down 0.87%
Newmont (NEM) $59.16 up 0.16%
US Gold (UXG) $5.88 down 2.33%
General Moly (Eureka Moly, LLC) (GMO) $3.618 down 5.04%
Thompson Creek (TC) $7.60 down 3.43%
Freeport-McMoRan (FCX) $44.16 down 5.26% (a bellwether mining stock spanning copper, gold & molybdenum)
Quadra FNX (TSE:QUX) (presently not available)
Timberline Resources (TLR) $0.785 down 0.63%
The Steels are mixed (a "tell" for General Moly & Thompson Creek):
ArcelorMittal (MT) $20.90 down 6.19% - global steel producer
POSCO (PKX) $91.66 down 4.50% - South Korean integrated steel producer
The Eureka Miner's Grubstake Portfolio is [presently not available](what's this?).
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 and was followed by an S&P credit downgrade. 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 firstname.lastname@example.org for answers to your questions or to request e-mail updates on the market