Bellwether Freeport Down the Shaft; Barrick, Newmont Rock

My latest Kitco Commentary: Why is Gold More Volatile than Copper, Oil or Silver? (09-19-2011)

*** BREAKING NEWS *** COMEX gold and copper both dropped after the Fed announced the start of "Operation Twist" (see below) but no expansion of their balance sheet going forward. COMEX gold is $1,787.8/oz and COMEX copper is $3.7065/lb at 12:59 PM for an unchanged gold to copper ratio of 482 lb/oz (recessionary level)

*** BREAKING NEWS *** Checkout the LA Times article on Elko, NV

Elko, Nev., takes the gold boom with a grain of doubt

This morning's...
COMEX Gold price = $1,802.8/oz (December contract most active)
Eureka Miner’s Gold Value Index© (GVI) = 100.50
Value Adjusted Gold Price© (VAGP) = $1,498.9/oz
COMEX - VAGP = $303.9/oz; gold is trading at a premium; key gold-referenced commodity ratios remain at recessionary levels (e.g., copper & oil)


Wōdnesdæg
Morning Miners!

It is 5:40 AM. Have a cup of Miner's Golden Brew. The Colonel has to put up with Old Miner Woden all day, I'd rather babysit Ruby T's grand kids. The cranky codger couldn't be happier to see copper prices falling and gold mining stocks rising, "Colonel, there's no durn reason that red metal should cost more than a buck-fifty!" He was a copper miner in Arizona back in the day, but that's a story for another Wednesday...

Bellwether Freeport Down the Shaft; Barrick, Newmont Rock

These are strange times indeed. The big market mover today is expected to be the Federal Reserve's announcement after the  2-day FOMC meeting. Investors are watching for any signs of additional monetary stimulus and it is thought most likely to come in as "Operation Twist" which changes the composition of its securities portfolio so it holds more longer-term debt. Kitco's Jim Wycoff says:

Many believe the Fed will implement a so-called "twist" move, which is an effort to keep longer-term U.S. interest rates at very low levels. Such a move by the Fed should be gold and commodity-market bullish, as it would not only make the returns on hard assets more appealing, but it would also likely put some downside price pressure on the U.S. dollar index, or at least limit its upside movement. (Kitco News, 09/20/2011)

Copper price could certainly use a lift. Although COMEX copper is up a tad today at $3.7445/lb, it is now not only below $4/lb but the $3.75/lb level - if it heads below $3.5/lb the ole Colonel is heading for the hills. This report believes that copper's value relative to gold is even more important than US dollar price. This morning, with COMEX gold at $1,802.8/oz, the gold:copper ratio is at a new peak of 482 lbs/oz. To give this some perspective, on February 4 of this year an ounce of gold bought 293 lbs of the red metal; today it buys 482 lbs - a difference of 189 pounds!

The fall of copper price on lower (and perhaps dire) global growth expectations together with mining strikes at its Grasberg mine have been devastating to Freeport-McMoran's (FCX) stock price. This is important because the copper giant is considered the bellwether for all non-precious metal miners (although FCX does produce considerable gold and molybdenum byproduct to their primary copper production). As Freeport goes, so goes everybody else.

Today FCX fell further down the mineshaft to make a new 52-week low. Even more sobering: by trading presently at $37.12, it is now not only below its 200-day moving average ($51.92) but its 600-day average too ($41.81). At these prices, Freeport does pay a 2.7% dividend beating the current 10-year Treasury rate (1.9%).

Here is a one-year chart of Freeport (blue line) plotted with its 200-day average (green line) - not pretty:

What tickles Old Miner Woden is the reverse fate of the large-cap gold miners. Barrick Gold (ABX) and especially Newmont (NEM) have been on a tear lately. Here are there one-year charts and 200-day moving averages:

This morning, Barrick is trading at $54.18 and Newmont at $69.58 with respective dividends of 0.89% and 1.72%. Newmont has recently stated that they intend to scale there dividend with expected rises in gold price.

So what did the Colonel do? I threw a few shares of Freeport in the buckboard at $36.67. Shucks, I'll wait for copper prices to recover (someday) given a 2.7% dividend. Old Miner Woden just called me a "Damn fool!" for trying to catch a falling knife - he may be right, please do your own research.

That's all, pardner.


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 83.74, down from yesterday's 90.39 and below the 1-month moving average of 101.12. The EMI set a new low for 2011 of 74.53 on August 9. It is troubling that the 1-month average is very near 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 100.50, down from yesterday's 99.33 and above its 1-month average of 98.67. The new record high for 2011, was set Tuesday, September 6th at 103.43. The Value Adjusted Gold Price© (VAGP) is $1,498.9/oz or $303.9/oz below the current COMEX gold price.

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 with vigor. A sustained presence around the 100-level may prove to 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.

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 and GVI indices. Today, the DCI has a value of 178.3 up from yesterday's 170.7. Our benchmark is 100, a value of the DCI at a level above 200 is time for serious concern. We are now below 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 $86.38
ICE North Sea Brent crude $111.03
Spread (ICE- NYMEX) = $24.65 (Friday, $23.74)

Here are the January contracts* with a narrower spread:

NYMEX light sweet crude $86.94
ICE North Sea Brent crude $108.55
Spread (ICE- NYMEX) = $21.61 (Friday, $21.25)

* NYMEX futures contracts have rolled forward, we now show November and January for a 2-month look-ahead

Prices are off their crisis highs and we have $100+ Brent and $85+ NYMEX in January favoring high oil prices throughout the late fall and early winter. 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 seriously below its 200-day moving average of $51.92 (our new key level, 09/21 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 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 $0.54 in early trading at $86.38 (November contract, most active); Gold is down $6.3 to $1802.8 (December contract, most active); Silver is up $0.223 to $40.360 (December contract, most active); Copper is up $0.0190 at $3.7445 (December contract, most active)

Western Molybdenum Oxide (General Moly website) is $14.50; European Molybdenum Oxide (Bloomberg) is $14.55; LME cash seller is $14.74, LME moly 3-month seller's contract is $14.74

Stock Market Morning Update

The DOW is down 2.73 points to 11,405.93; the S&P 500 is down 1.53 points at 1200.53

Miners are mixed:

Barrick (ABX) $54.18 up 0.35%
Newmont (NEM) $69.58 down 0.46%
US Gold (UXG) $5.65 up 0.71%
General Moly (Eureka Moly, LLC) (GMO) $3.24 up 0.93%
Thompson Creek (TC) $7.39 up 0.68%
Freeport-McMoRan (FCX) $37.12 down 3.71% (a bellwether mining stock spanning copper, gold & molybdenum)
Quadra FNX (TSE:QUX) $10.17 down 1.36%
Timberline Resources (TLR) $0.74 down 2.63%

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

ArcelorMittal (MT) $17.22 up 0.70% - global steel producer
POSCO (PKX) $87.12 down 3.12% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is down 0.38% at $1,525,553.11(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 photo by Mariana Titus

Write Colonel Possum at colonelpossum@gmail.com for answers to your questions or to request e-mail updates on the market