"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.

Friday, August 19, 2011

$1,881.4/oz Gold; Giddy Up Silver $42.640/oz

Silver Spurs

And she'd sing rowles that ring like bells in the night
Silver spurs flashing in Utah moonlight
Hoof beats that echo out over the hills
Songs and the stars and a memory that thrills
My heart my heart my heart
Like the ring of his spurs

Like the ring of his spurs

Bar-J Wranglers

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

Morning Miners!

It is 5:48 AM. Have a cup of Raine's finest. It's been a rough-tough market week unless you've got a lot of gold and silver under your mattress...

$1,881.4/oz Gold; Giddy Up Silver $42.640/oz

COMEX gold charged out of the early morning gates to score a new nominal price record of $1,881.40/oz at 3:40 AM EDT. COMEX silver followed 30 minutes later to peg $42.640/oz, a level not seen since early May. Giddy up go!

Presently, Gold is up $45.4 at $1,867.4/oz; Silver is up $1.747 at $42.435/oz.

Nothing like a little worry about the global economy dipping into recession and the health of the European banking system to stampede the precious metal herd. This may be life as we know it for a while longer, pardner. With this much fear around, investors are pouring money into gold and U.S. Treasurys. The 10-year T-note dipped below 2% yesterday to 1.974%, a level not seen since 1954 (demand moves bond prices higher; yields lower). The next low is 1.67% set in 1945, today the 10-year is at back above 2% at 2.097%.

Here is my weekly input to the Kitco gold survey:

The bond markets and headlines from Europe will trump fundamentals next week supporting more near-term rises in gold price. From a commodity viewpoint, both the gold:copper and oil:copper ratios are nearing 2008-2009 recession extremes* (presently above 450 lbs/oz & 21 bbl/oz, respectively). This indicates gold price is over extended for those who believe in the slow-but-steady growth scenario. For a more pessimistic outlook, these levels may be signalling contraction.

* In early December 2008, the gold:copper ratio was above 570 lbs/oz; gold:oil ratio exceeded 21 bbl/oz. Ranges of 300-400 lbs/oz & 14-18 bbl/oz are more typical in less turbulent times.

Notably, the Gold Value Index (GVI) just set a new high at 104.1 placing the value of gold relative to key commodities at a higher level than the so-called "Flash Crash" Redux June 7th 2010. The Value Adjusted Gold Price (VAGP) is a lowly $1,498.7/oz a full $368.7/oz below the present gold price (further discussion of GVI and VAGP below).

My next Kitco commentary will be about the VAGP. 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 87.31, up from yesterday's 85.93 and below the 1-month moving average of 176.77. 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 above par at 104.11, up from yesterday's 99.79 and well above its 1-month average of 89.09. This marks a new high for 2011, the old high of 100.70 was set August 10th. Today's Value Adjusted Gold Price (VAGP) is $1,498.7/oz or $368.7/oz below the current COMEX gold price.

Although gold prices were on the rise, the initially GVI trended down from 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 above 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 Index (DCI). 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 257.1 up from yesterday's 228.4. 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. 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 $81.70
ICE North Sea Brent crude $107.25
Spread (ICE- NYMEX) = $25.62(yesterday, $23.36)

Here are the December contracts* with a narrower spread:

NYMEX light sweet crude $82.48
ICE North Sea Brent crude $106.44
Spread (ICE- NYMEX) = $23.96(yesterday, $22.58)

* NYMEX futures contracts have rolled forward, we now show October and December 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 early winter 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 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 $0.81 in early trading at $81.70 (October contract, most active); Gold is up $45.4 to $1867.4 (December contract, most active); Silver is up $1.747 to $42.435 (September contract, most active); Copper is up $0.0085 at $3.9745 (September contract, most active)

Western Molybdenum Oxide (Infomine) is $14.97; European Molybdenum Oxide (Bloomberg) is $14.55; LME cash seller is $14.97, LME moly 3-month seller's contract is $14.97

Stock Market Morning Update

The DOW is up 11.35 points to 11,001.93; the S&P 500 is up 5.46 points at 1,146.11

Miners are up:

Barrick (ABX) $51.10 up 2.45%
Newmont (NEM) $59.99 up 2.69%
US Gold (UXG) $6.02 up 4.88%
General Moly (Eureka Moly, LLC) (GMO) $3.78 up 3.00%
Thompson Creek (TC) $7.64 up 0.79%
Freeport-McMoRan (FCX) $43.46 up 1.42% (a bellwether mining stock spanning copper, gold & molybdenum)
Quadra FNX (TSE:QUX) $12.36 up 1.08%
Timberline Resources (TLR) $0.78 unchanged

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

ArcelorMittal (MT) $20.15 down 0.35% - global steel producer
POSCO (PKX) $89.49 down 1.11% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is up 2.07% at $1,597,872.91 (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 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 colonelpossum@gmail.com for answers to your questions or to request e-mail updates on the market

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