Value Adjusted Gold Price $1,527.1/oz

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

Morning Miners!

It is 5:32 AM. Have a cup of Monday Up-and-At'Em. Thankfully, this morning is pretty quite in the markets. The European sovereign debt crisis is far from resolution and investors are no doubt treading water until the planned meeting Tuesday between France's Nicolas Sarkozy and Germany's Angela Merkel. As I said Friday, maybe they can pull a rabbit out of the hat to soothe markets but any near term solution will likely fall short of true euro-fiscal integration. Let's take this lull to reflect on gold and the mining sector...

Value Adjusted Gold Price $1,527.1/oz

One of the impressive outcomes from all the recent market turmoil has been the rise in gold dollar price and value relative to key commodities. COMEX gold topped out at $1,817.60/oz last week and has since fallen back. Presently COMEX gold is about where it was at Friday's close, trading at $1,741.2/oz.

Gold value as measured by this Report's Gold Value Index (GVI) briefly broke 100, a high not seen since June 7th 2010 - the day the DOW fell below the "Flash Crash" low registered one month earlier. On Wednesday the GVI touched 100.7 a full 48.7% rise in relative value from April 11th 2011. Here is a chart of the GVI from the "Flash Crash" Redux through Friday's close (a larger and more readable chart can be found at the bottom of this blogpage):



High-value gold in 100-territory is not a sustainable level with respect to other commodities, notably oil & copper. As a consequence, the forces of gravity took hold and the GVI descended with gold price to 95.7 on Friday; presently it sits at 95.3, above the market norm of 83.6 and 1-month moving average of 85.5.

Given that the 1-month average is now also above the norm or "equilibrium line" suggests gold is currently overvalued and will see further downside until the next bad headline fuels its rocket tanks. If the GVI reaches equilibrium, gold, in relation to oil, copper and silver, will be closer to historical norms.

Another way to look at the dramatic rise in value is to compare gold with oil and copper. On Thursday an ounce of gold bought 5 more barrels of oil than the last market day of July (7/29/11); a 29.6% increase. It bought 80 lbs more of the red metal over the same period; a 22.1% increase. We'll see what Sarkozy and Merkel do to these numbers later this week.

This Report's Value Adjusted Gold Price (VAGP) computes a gold price that supports current oil, copper & oil prices based on historical commodity norms. At Friday's close, the VAGP was $1,520.8/oz; this morning it has risen a bit to $1,527.1/oz an amazing $214.1/oz below COMEX gold at $1,741.2/oz. Stay tuned.

A New Bottom for Miners?

About the best thing one can say about the mining sector is that it may have found a new bottom for the year during last week's roller coaster ride. Here is a chart of the Eureka Miner's Index(EMI) as of the Friday's closing numbers (a larger and more readable chart can be found at the bottom of this blogpage):



Hopefully, August 9th marks the 2011 low of 74.5. It's been a rough ride, pardner (see further discussion below). Today we are just slightly above-par at 100.3.


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 100.27, up from Friday's 97.7 and below the 1-month moving average of 12.22. 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 was 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 95.27, down from Friday's 97.97 and well above its 1-month average of 85.46. A new high for 2011 of 100.70 was set August 10th. Today's Value Adjusted Gold Price (VAGP) is $1,527.1/oz or $214.1/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 191.2 down from Friday's 212.7. 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 still 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 $86.11
ICE North Sea Brent crude $108.62
Spread (ICE- NYMEX) = $22.51 (Friday, $22.01)

Here are the November contracts* with a narrower spread:

NYMEX light sweet crude $86.80
ICE North Sea Brent crude $108.28
Spread (ICE- NYMEX) = $21.48 (Friday, $20.80)

* 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 $0.73 in early trading at $86.11 (September contract, most active); Gold is down $1.4 to $1741.2 (December contract, most active); Silver is up $0.051 to $39.165 (September contract, most active); Copper is down $0.0004 at $4.0080 (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 121.55 points to 11,390.57; the S&P 500 is up 14.84 points at 1,193.65
Miners are mixed:

Barrick (ABX) $49.30 down 0.52%
Newmont (NEM) $57.02 down 0.73%
US Gold (UXG) $6.11 up 0.49%
General Moly (Eureka Moly, LLC) (GMO) $4.04 up 2.54%
Thompson Creek (TC) $7.92 up 2.19%
Freeport-McMoRan (FCX) $46.09 up 1.52% (a bellwether mining stock spanning copper, gold & molybdenum)
Quadra FNX (TSE:QUX) $13.25 up 0.46%Timberline Resources (TLR) $0.74 down 1.33%

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

ArcelorMittal (MT) $23.42 up 2.76% - global steel producer
POSCO (PKX) $94.52 up 1.37% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is down 1.00% at $1,618,169.62 (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