$1,923.70/oz Gold; All Eyes on Europe

My latest Kitco Commentary: The Copper-Gold Conundrum (9/6/2011)

This morning's...
COMEX Gold price = $1,894.0/oz (December contract most active)
Eureka Miner’s Gold Value Index© (GVI) = 103.43
Value Adjusted Gold Price© (VAGP) = $1,530.0/oz
COMEX - VAGP = $364.0/oz; gold remains overvalued; key gold-referenced commodity ratios are at recession levels (e.g., copper & oil)


Morning Miners!

It is 5:42 AM. Have a hot cup of Short Week Willies. Our market bull Ruby T isn't talking to anyone in the break room this morning. I'm sure glad Old Miner Woden is back at Lone Mountain, he probably doesn't know that gold took a shot at $2,000/oz this morning. Glitter is about the only thing up in these stormy markets...

$1,923.70/oz Gold & a Eureka Miner’s Gold Value Index© (GVI) new high

Equity markets in Europe were taken to the woodshed yesterday while we were enjoying a fine Labor Day. The sovereign debt crisis across the pond is center stage in today's world of worry. Kitco's Allen Sykora carried a Dennis Gartman summation of the situation in his morning Market Nugget, “The situation in Europe is becoming more and more severe with each passing day, and we are approaching that time when each nation is now looking out properly for its own best interests, and the people of Europe are considering what it is that shall serve them best.” Dennis Gartman is the author/publisher of the respected Gartman Letter, when he speaks the Colonel listens.

Gartman concludes, “Simply put, Germany and Germans are growing more and more certain that they’ve spent as much money as they deem necessary and reasonable to keep the monetary union intact.” There is a key vote in Germany tomorrow on EU bailouts which could prove to be a real market mover. If Gartman is correct about negative German sentiment, gold could soar. He maintains a long position in gold in non U.S. dollar terms.

In the wee hours, COMEX gold set a new nominal price record of $1,923.70/oz (December contract most active). The Swiss announced that they would defend their currency by pegging it to the falling euro; the Swiss franc has become a popular safe haven refuge for worried investors.  COMEX gold dove $61.90/oz on the news but then recovered. It is presently trading at a respectable $1,894.0/oz up $17.1 from Friday's close. COMEX silver is at $42.245/oz for a gold:silver ratio of 44.83 losing some ground to gold from Friday's 43.56 (a smaller number implies stronger gold).

All of this market commotion sent the Eureka Miner’s Gold Value Index© (GVI) to a new high of 103.4 up from Friday's 101.1. 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):

A GVI above the 100-level indicates we are at a high-value relative to current oil, copper and silver prices. Gold trading at a premium is a measure of the fear that exists in the marketplace driven primarily by the uncertainty caused by the European sovereign debt crisis.

Even more worrisome are the recession-levels of both the copper:gold and oil:gold ratios. The Colonel's rule-of-thumb is that former needs to be below 400 lb/oz and the latter, below $20/bbl to have any hope for a slow-but-steady growth scenario. This morning the gold:copper ratio is a 467.7 lbs/oz and gold:oil is $22.54 bbl/oz - sobering levels indeed. Checkout my latest Kitco Commentary: The Copper-Gold Conundrum for more thoughts on what this may imply about the future.

Eureka Miner's Index© (EMI)

The Eureka Miner's Index© (EMI) shows just what a tough time mining companies continue to have. Here is a chart over the same time period as the GVI (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 EMI (magenta line) rose above 100 last week but finds itself just below the key marker this morning at 99.29. A disturbing sign is that the one-month moving average (blue line) is very close to breaking 100 to the downside sitting at 100.6 presently. Ouch.

More discussion of the GVI and EMI are in the Roundup that follows...


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 99.29, down from Friday's 117.23 and above the 1-month moving average of 100.57. The EMI set a new low for 2011 of 74.53 on August 9. It is troubling that the 1-month average is almost at the 100-level.

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 to update mining equity norms in the EMI on a monthly basis.

Gold Value Index (GVI)

The Eureka Miner’s Gold Value Index© (GVI) is above-par at 103.43, up from Friday's 100.10 and above its 1-month average of 97.86. This is a new record high for 2011, the old high was 102.71 set Friday, August 19th. The Value Adjusted Gold Price© (VAGP) is $1,530.0/oz or $364.00/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 reversing the trend, moved sideways for a time and and headed back up recently with vigor. Its sustained presence around the 100-level may be a recession warning for a second dip down in the economy.

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.

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 212.6 up from Friday's 186.4. 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 $84.03
ICE North Sea Brent crude $110.83
Spread (ICE- NYMEX) = $26.80 (Yesterday, $26.22)

Here are the December contracts* with a narrower spread:

NYMEX light sweet crude $84.67
ICE North Sea Brent crude $109.22
Spread (ICE- NYMEX) = $24.55 (Yesterday, $24.00)

* 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 $80+ NYMEX in December favoring high oil prices throughout the fall and into early winter although price weakness in NYMEX has reappeared. My last 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 below its 200-day moving average of $52.45 (our new key level, 08/31 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 down $2.42 in early trading at $84.03 (October contract, most active); Gold is up $17.1 to $1894.0 (December contract, most active); Silver is down $0.824 to $42.245 (December contract, most active); Copper is down $0.0745 at $4.0500 (December contract, most active)

Western Molybdenum Oxide (Infomine) is $14.52; European Molybdenum Oxide (Bloomberg) is $14.70; LME cash seller is $14.51, LME moly 3-month seller's contract is $14.51

Stock Market Morning Update

The DOW is down 211.23 points to 11,029.03; the S&P 500 is down 21.74 points at 1152.23

Miners are mixed:

Barrick (ABX) $54.43 up 2.95%
Newmont (NEM) $65.53 up 2.12%
US Gold (UXG) $6.26 up 2.45%
General Moly (Eureka Moly, LLC) (GMO) $3.73 down 1.58%
Thompson Creek (TC) $7.69 down 2.66%
Freeport-McMoRan (FCX) $43.95 down 2.20% (a bellwether mining stock spanning copper, gold & molybdenum)
Quadra FNX (TSE:QUX) $12.24 down 2.10%
Timberline Resources (TLR) $0.82 up 3.53%

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

ArcelorMittal (MT) $18.28 down 8.32% - global steel producer
POSCO (PKX) $92.37 down 1.03% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is down 0.54% at $1,630,586.98 (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