Good Night Irene

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

This morning's...
COMEX Gold price = $1,817.5/oz (December contract most active)
Eureka Miner’s Gold Value Index© (GVI) = 97.19
Value Adjusted Gold Price© (VAGP) = $1,562.6/oz
COMEX - VAGP = $254.9/oz; gold is overvalued relative to key commodities

Morning Miners!

It is 5:34 AM. have a cup of Monday Courage. Hurricane Irene has passed - nobody at the NYSE is wearing rubber boots, Greeks are happy about a bank merger and it is a new moon. Maybe we're looking at the start of a good market week...

Eureka Miner’s Gold Value Index© (GVI)

Here is an updated chart of the Gold Value Index© (GVI) through Friday's close (a larger more readable version is given near the bottom of this blog page):

COMEX gold has rebounded in value and price from the $1,705.4/oz low of last Thursday. This morning COMEX is trading up $20.2/oz at $1,817.5/oz and the GVI is just slightly down from Friday at 97.19 and above the one-month moving average (blue line).

A GVI near the 100-level indicates we are still at a high-value relative to current oil, copper and silver prices. Gold trading at a premium is a measure of the fear that still exists in the marketplace driven primarily by the uncertainty caused by the European sovereign debt crisis. Greece's EFG Eurobank and Alpha Bank were set to merge which is positive for relieving some pressure on European banks. The ole Colonel believes this is far from over lending continued support to precious metals.

Although Fed Chairman Ben Bernanke's comments Friday lacked specifics it is now generally thought they were commodity market bullish. COMEX copper has indeed made steady progress in regaining price since Monday, 8/22, and is presently trading up $0.0168/lb at $4.1080/lb. This puts the gold:copper ratio at a still lofty 442.4; a ratio in a range of 300-400 would be a sign of less volatile times for metal prices. NYMEX oil has also seen some bounce trading up $1.34 today at $87.34/bbl. The gold:oil ratio of 20.81 indicates that, like copper, it's outside of a more normal range of 13-18.

The gold:copper and gold:oil one-month and three-month correlations tell a similar story:

Au:Cu correlation  -0.8405 (one-month) -0.3645 (3-month)
Au:Oil correlation  -0.7167 (one-month) -0.7738 (3-month)

By this Reports' definition Au:Cu and Au:oil are in a "deep inversion" when both the one-month and 3-month correlations are negative - a very bearish condition for metals and miners. There are some signs of slowing negativity in both which is supported by the recent price strength in copper and oil.

Value Adjusted Gold Price© (VAGP)

We can transform the above GVI into a dollar-denominated Value Adjusted Gold Price (VAGP). The VAGP is a level that supports current oil, copper & oil prices based on historical commodity norms. Here is the companion VAGP plot over the same time period as the GVI (a larger more readable version is given near the bottom of this blog page):

Notice that COMEX gold price (dark blue line) is quite elevated in comparison to the VAGP (magenta line) showing that gold is currently overvalued. This morning's numbers don't do much to close this gap with a VAGP of $1,562.6/oz compared to a COMEX gold price of $1,817.5/oz - a significant difference of  $254.9/oz. Further discussion of the GVI and VAGP follows in the Daily Market Roundup below.

Eureka Miner's Index© (EMI)

Finally, the Eureka Miner's Index© (EMI) shows just what a tough time mining companies have had this year. Here is a chart over the same time period as the GVI an VAGP (a larger more readable version is given near the bottom of this blog page):

From an EMI of 816.8 a at the beginning of the year, we have trended mostly down dropping below the critical 100-level into solid bear country. The current EMI (magenta line) inched above 100 Friday and this morning is a little higher at 110.4 on improving news from Europe. The EMI needs to cross above the one-month moving average (blue line) before the ole Colonel gives our poor miners any shade of green light. The copper and moly miners seem to be enjoying a nice morning bounce with bellwether Freepot-McMoran (FCX) up 1.3% at $45.12; General Moly (GMO) is up 1.05% at $3.86. more discussion on the EMI and the miners is given in the Roundup...


Daily Market Roundup

Enough talk, let's walk the walk:

Eureka Miner's Index(EMI)

This morning the Eureka Miner's Index© (EMI) is above-par at 110.03, up from Friday's 103.54 and below the 1-month moving average of 120.33. The EMI set a new low for 2011 of 74.53 on August 9.

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

Gold Value Index (GVI)

The Eureka Miner’s Gold Value Index© (GVI) is below-par at 97.19, down from Friday's 97.37 and above its 1-month average of 94.27. The record high for 2011 was 102.71 set Friday, August 19th. Today's Value Adjusted Gold Price© (VAGP) is $1,562.6/oz or $254.9/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 201.7 down from Friday's 211.8. 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 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 $87.34
ICE North Sea Brent crude $112.02
Spread (ICE- NYMEX) = $24.68 (Friday, $26.24)

Here are the December contracts* with a narrower spread:

NYMEX light sweet crude $87.97
ICE North Sea Brent crude $111.16
Spread (ICE- NYMEX) = $23.19 (yesterday, $24.65)

* 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 $110+ Brent and $85+ NYMEX in December favoring high oil prices throughout the fall and into early winter. 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 $1.97 in early trading at $87.34 (October contract, most active); Gold is up $20.2 to $1817.5 (December contract, most active); Silver is up $0.168 to $41.120 (September contract, most active); Copper is up $0.0168 at $4.1120 (September contract, most active)

Western Molybdenum Oxide (Infomine) is $14.97; European Molybdenum Oxide (Bloomberg) is $14.50; LME cash seller is $14.97, LME moly 3-month seller's contract is $14.97

Stock Market Morning Update

The DOW is up 174.67 points to 11,459.21; the S&P 500 is up 20.70 points at 1197.50

Miners are mixed:

Barrick (ABX) $50.24 down 1.32%
Newmont (NEM) $61.41 down 1.22%
US Gold (UXG) $5.86 up 0.51%
General Moly (Eureka Moly, LLC) (GMO) $3.86 up 1.05%
Thompson Creek (TC) $7.84 up 2.35%
Freeport-McMoRan (FCX) $45.12 up 1.32% (a bellwether mining stock spanning copper, gold & molybdenum)
Quadra FNX (TSE:QUX) $12.68 up 1.31%
Timberline Resources (TLR) $0.76 down 1.30%

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

ArcelorMittal (MT) $20.72 up 2.73% - global steel producer
POSCO (PKX) $91.53 up 2.05% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is up 0.04% at $1,597,311.78(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