Bear Country?

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


Þūnresdæg
Morning Miners!

It is 5:52 AM. Have a cup of Thor's Destruction Derby Java. Our favorite Norseman says it tastes best in a rusty cup. Unlike Ruby T and Old Miner Woden, Thor doesn't give a hoot about the markets. He does like crashes and we've had a good one this August. I tried to explain that to the semi-retired thunder god but he doesn't understand why the market didn't go ka-BOOM when it lost 18% of it's value since late July. I must not have enough rust in my cup, Thor's coffee tastes horrible! He needs to get out of here and go work on some summer lightning.

Bear Country?


A conventional indication of a new bear market occurs when a broader market drops 20% or more from its high water mark. On May 2nd the S&P 500 hit an intraday high of 1,370.58, a full 106% up from the March 6th 2009 S&P 500 bottom of 666.79. Nice bull rally from the depths, pardner.

On August 9th we dropped 19.6% from this early May peak plumbing 1,101.54 on an intraday basis. Yesterday the S&P 500 closed at 1,120.76 or about 18.2% down - too close to Bear Country for my comfort. The markets are now open and the S&P is up in early morning trading at 1,134.96 which is terrific but the ole Colonel thinks we may be may be headed lower again given the banking woes emanating from Europe and the dramatic decline in Bank of America stock this month (a 33% drop in 3-market days to a closing low on August 8th).

Something is brewing in the financial world that is eerily reminiscent of 2008-2009. My indicator is the frequency of talking heads telling you that everything is really OK in the global banking system and not to worry. Remember the soothing comments from John Thain, the last chairman and chief executive officer of Merrill Lynch?

The London Interbank Offered Rate (LIBOR) is another good thing to watch. It is a daily reference rate based on the interest rates at which banks borrow unsecured funds from other banks in the London wholesale money market. Put simply, it is a measure of how much banks trust each other; the higher the number, the lower the trust. The 3-month LIBOR remained pretty solidly at 0.25% but has recently moved up to 0.28% - no panic yet, just keeping my eyes on the warning signs (After the Lehman Brothers' bankruptcy the October 2008 3-month LIBOR blew up to 4.0525%).

Lastly, this Report's Debt Crisis Index has been well above the 200-level for 4-market days. The ole Colonel identified a DCI above 200 as a time for serious market concern. When the S&P hit its low on August 9th, the morning DCI made its high of 272.1. Presently it stands at 253.1 although the broader markets appear to be in rally mode.

If we do enter bear country, leave the range gate to the bull pasture open - we may need a way to get back in someday.


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 81.33, down from yesterday's 82.02 and below the 1-month moving average of 230.11. 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. 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 just below par at 99.28, down from yesterday's 100.70 and well above its 1-month average of 83.99. A new high for 2011 of 100.70 was set August 10th. Today's Value Adjusted Gold Price (VAGP) is $1,491.6/oz or a startling $280.6/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 253.1 up from yesterday's 245.6. 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 $82.76
ICE North Sea Brent crude $105.97
Spread (ICE- NYMEX) = $23.21 (Yesterday, $24.19)

Here are the November contracts* with a narrower spread:

NYMEX light sweet crude $83.54
ICE North Sea Brent crude $105.84
Spread (ICE- NYMEX) = $22.30 (Yesterday, $23.09)

* 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 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 $0.13 in early trading at $82.76 (September contract, most active); Gold is down $12.1 to $1772.2 (December contract, most active); Silver is up $0.742 to $38.620 (September contract, most active); Copper is up $0.1055 at $3.9940 (September contract, most active)

Western Molybdenum Oxide (Infomine) is $15.42; European Molybdenum Oxide (Bloomberg) is $14.80; LME cash seller is $15.42, LME moly 3-month seller's contract is $15.42

Stock Market Morning Update

The DOW is up 120.94 points to 10,840.88; the S&P 500 is up 14.20 points at 1,134.96

Miners are mixed:

Barrick (ABX) $48.14 down 3.06%
Newmont (NEM) $56.00 up 0.34%
US Gold (UXG) $5.94 down 1.33%
General Moly (Eureka Moly, LLC) (GMO) $3.82 down 1.04%
Thompson Creek (TC) $7.64 up 2.83%
Freeport-McMoRan (FCX) $44.16 up 1.40% (a bellwether mining stock spanning copper, gold & molybdenum)
Quadra FNX (TSE:QUX) $12.56 up 1.96%
Timberline Resources (TLR) $0.71 down 1.39%

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

ArcelorMittal (MT) $21.57 up 1.03% - global steel producer
POSCO (PKX) $89.71 up 0.10% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is down 0.63% at $1,558,821.21 (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