$5,200/oz Gold by 2018 - Louise Yamada

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


Morning Miners!

It is 5:35 AM. Have a hot cup of Gold Label Hump Day Joe. Old Miner Woden couldn't be happier; COMEX gold posted a new closing high yesterday and is heading higher this morning - I don't know if I can take our market bear's "I-told-you-so" chorus much longer. Of course, it is great to see the yellow metal on the rise...

$5,200/oz Gold by 2018 - Louise Yamada

Although the recent intraday record of $1,817.60/oz remains unchallenged, COMEX gold set a new closing high yesterday at $1,785.0/oz and is presently trading up $3.8/oz at $1,788.8/oz. We're just a few headlines away from $1,800/oz again. COMEX silver has regained some of its mojo too up $0.326/oz at $40.145/oz. The closely watched gold:silver ratio is 44.6 very near the top of the 39-45 range we've been in since early May. If that holds, rising gold will keep silver safely in $40/oz pasture.

The ole Colonel saw a terrific CNBC Business interview with technical analyst Louise Yamada yesterday. Here is the video link:

$5,200/oz Gold by 2018 - Louise Yamada (CNBC Business News)

Two years ago she called $2,000/oz gold and here we are at the doorstep. She sees gold in a 30-year "structural bull market" that will eventually bring us to $5,200/oz by 2018. There is also some interesting commentary about how the popularity of gold exchange traded funds (ETFs) has created headwinds for gold stocks. This is the Barrick Gold (ABX) problem whose share performance has been abysmal compared to the rise in the price of their primary product. Given yesterday's close, ABX is down 5.7% for the year with a measly 0.96% dividend. In startling contrast, the mammoth SPDR Gold Trust ETF is up 25.4%.

Louise Yamada is one of the Colonel's favorites right in there with Commodity King Dennis Gartman and market bear Doug Kass. She has a subtle charm and drama as well as technical prowess - a voice from the Delphic oracle. Check out her video on your next break.


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 97.71, down from yesterday's 100.51 and below the 1-month moving average of 194.41. 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 95.90, down from yesterday's 96.63 and well above its 1-month average of 86.98. A new high for 2011 of 100.70 was set August 10th. Today's Value Adjusted Gold Price (VAGP) is $1,558.5/oz or $230.3/oz below the current COMEX gold price.

Although gold prices were 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 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 184.0 down from yesterday's 202.3. 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 still dangerously near 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 $88.54
ICE North Sea Brent crude $111.46
Spread (ICE- NYMEX) = $22.92 (yesterday, $22.27)

Here are the November contracts* with a narrower spread:

NYMEX light sweet crude $89.05
ICE North Sea Brent crude $111.22
Spread (ICE- NYMEX) = $22.17 (yesterday, $21.48)

* 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 weakened 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 up $1.89 in early trading at $88.54 (September contract, most active); Gold is up $3.8 to $1788.8 (December contract, most active); Silver is up $0.326 to $40.145 (September contract, most active); Copper is up $0.0455 at $4.0395 (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 up 93.66 points to 11,499.59; the S&P 500 is up 13.39 points at 1,206.15

Miners are mostly up:

Barrick (ABX) $50.87 up 1.40%
Newmont (NEM) $59.84 up 1.91%
US Gold (UXG) $6.24 up 1.63%
General Moly (Eureka Moly, LLC) (GMO) $3.97 up 3.39%
Thompson Creek (TC) $8.00 up 1.39%
Freeport-McMoRan (FCX) $47.34 up 2.89% (a bellwether mining stock spanning copper, gold & molybdenum)
Quadra FNX (TSE:QUX) (presently not available)
Timberline Resources (TLR) $0.7968 down 0.40%

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

ArcelorMittal (MT) $22.73 up 1.61% - global steel producer
POSCO (PKX) $96.63 up 0.83% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is [presently not available](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 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