Dog Days of Summer

diēs caniculārēs

*** BREAKING NEWS *** The COMEX gold sell-off has accelerated; presently trading at $1,780.6/oz down $80.7/oz from yesterday's close and $137.3/oz from Monday's record $1,917.9/oz

My latest Kitco Commentary: Buy or Sell Gold Now? Check the VAGP First
(8/22/2011)


Morning Miners!

It is 5:38 AM. Have a cup of Dog Days of Summer. I have to put up with Old Miner Woden griping about gold dropping more than $90/oz yesterday and markets that just don't know where to go - wait a minute, it's always like this in the waning days of August!

COMEX gold is falling another level trading near yesterday's lows; down $35.0/oz at $1,826.3/oz. It is important to see if today will be a key reversal for gold (i.e. lower highs, lower lows, lower close) after its parabolic surge to $1,917.90/oz Monday evening. COMEX silver is also down $1.181 at $41.110/oz preserving the mid range gold:silver ratio of 44.4 (the ratio has been 39-46 since early May). This report has expected a consolidation or correction in gold and silver prices before we return to the $1,900+/oz territory. It may take a while, "...for those who believe in a slow-but-steady growth outlook, gold prices are showing signs of being very over-extended with a re-convergence of gold price and VAGP overdue." (Kitco commentary, 8/22/2011)

Dog Days of Summer

Hurricane Irene is a category three hurricane, the largest we've seen since 2008 and may very well threaten the eastern seaboard from the Carolinas to Boston. A 5.8 earthquake in Virginia caused Capitol buildings and the Pentagon to be evacuated yesterday. Those are some real headlines but not real market movers. The ole Colonel watched the floor of the NYSE on CNBC Business News when the earthquake wave passed through New York. Moments later an ominous post-911 voice on the PA system told floor specialists "Do not evacuate!" Keep trading, the markets must grind on and on.

It's not earthquakes or hurricanes that these brave folks are worried about; it's economic headlines from Europe or Ben Bernanke's overly anticipated speech on Friday that sparks their interest - but my sense is not that much. Their bosses are in the Hamptons or Martha's Vineyard or Cape Cod. I bet even a few troubled EU finance ministers have snuck back to the warm beaches of profligate Greece or southern France.

It's the last days of August, pardner. Gold is down, copper is up a bit, molybdenum spot and futures prices have been unchanged for days. Time to walk your dog, enjoy your summer - we'll be back in the mix soon enough.

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 96.16, up from yesterday's 77.70 and below the 1-month moving average of 142.98. 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 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 99.44, down slightly from yesterday's 101.57 and well above its 1-month average of 92.03. The record high for 2011 was 102.71 set Friday, August 19th. Today's Value Adjusted Gold Price (VAGP) is $1,534.6/oz or $291.8/oz below the current COMEX gold price.

Although gold prices were on the rise, the GVI initially 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 around the 100-level 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 212.1 down from yesterday's 263.5. 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 $85.64
ICE North Sea Brent crude $109.88
Spread (ICE- NYMEX) = $24.24(yesterday, $23.34)

Here are the December contracts* with a narrower spread:

NYMEX light sweet crude $86.32
ICE North Sea Brent crude $108.93
Spread (ICE- NYMEX) = $22.61(yesterday, $22.31)

* 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 $52.70 (our new key level, 08/22 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 up $0.20 in early trading at $85.64 (October contract, most active); Gold is down $35.0 to $1826.30 (December contract, most active); Silver is down $1.181 to $41.110 (September contract, most active); Copper is up $0.0170 at $4.0130 (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 97.07 points to 11,273.83; the S&P 500 is up 11.41 points at 1173.76

Miners are mixed:

Barrick (ABX) $49.95 down 1.46%
Newmont (NEM) $60.97 down 0.46%
US Gold (UXG) $5.75 down 1.88%
General Moly (Eureka Moly, LLC) (GMO) $3.70 down 0.80%
Thompson Creek (TC) $7.62 unchanged
Freeport-McMoRan (FCX) $42.95 up 0.14% (a bellwether mining stock spanning copper, gold & molybdenum)
Quadra FNX (TSE:QUX) $12.48 down 0.49%
Timberline Resources (TLR) $0.76 down 1.30%

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

ArcelorMittal (MT) $20.48 up 2.20% - global steel producer
POSCO (PKX) $90.00 down 1.92% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is down 0.79% at $1,575,331.76(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

It is 5:38 AM.