Friday, September 16, 2011
The Colonel's Friday Thoughts on Gold
My latest Kitco Commentary: The Copper-Gold Conundrum (9/6/2011)
COMEX Gold price = $1,790.9/oz (December contract most active)
Eureka Miner’s Gold Value Index© (GVI) = 96.14
Value Adjusted Gold Price© (VAGP) = $1,556.5/oz
COMEX - VAGP = $234.4/oz; gold is trading at a premium; key gold-referenced commodity ratios remain at recession levels (e.g., copper & oil)
It is 5:38 AM. Have a cup of Raine's delicious Red Label. It looks like we may close this crazy week on a positive note. Five central banks dropping U.S. dollars into the European financial system and a high-level meeting of EU leaders including the U.S. Treasury Secretary appear to have cooled off the European debt crisis for now. Nineteen of nineteen global markets that this report monitors are in the green. Let's get out of the break room early today before things head south!
The Colonel's input to the Weekly Kitco Gold Survey
Below is my weekly input to the Kitco gold survey. A short term consolidation phase appears to be in the cards although I think a re-emergence of scary headlines could bring $2,000/oz gold before Thanksgiving:
Three-month gold volatility is higher than for copper, oil or silver - a very unusual situation. In the short term, improvements in European expectations will take some of the boil off gold volatility and prices should experience an orderly trend down as other commodities rise. For example, the gold:copper ratio which has been recessionary will recover to lower levels as moderate global growth and supply restriction (e.g., Grasberg mine strike in Indonesia) replace headline shock. The longer term uptrend for gold is intact.
Have a good'un!
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 110.91, up from yesterday's 96.79 and above the 1-month moving average of 102.50. 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 although the last 3-days have been encouraging to the upside.
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 below-par at 96.14, down from yesterday's 96.56 and below its 1-month average of 98.51. The new record high for 2011, was set Tuesday, September 6th at 103.43. The Value Adjusted Gold Price© (VAGP) is $1,556.5/oz or $234.4/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 with vigor. A sustained presence around the 100-level may prove to be a recession warning for a second dip down in the economy although there are signs that the GVI is weakening.
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 168.4 down from yesterday's 183.4. 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 below that level and trending down.
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 $89.17
ICE North Sea Brent crude $113.78
Spread (ICE- NYMEX) = $24.61 (Yesterday, $26.07)
Here are the December contracts* with a narrower spread:
NYMEX light sweet crude $89.62
ICE North Sea Brent crude $112.31
Spread (ICE- NYMEX
* 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 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 $52.33 (our new key level, 09/08 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 $0.23 in early trading at $89.63 (October contract, most active); Gold is up $9.5 to $1790.9 (December contract, most active); Silver is up $0.699 to $40.200 (December contract, most active); Copper is up $0.0665 at $3.9840 (December contract, most active)
Western Molybdenum Oxide (General Moly website) is $14.50; European Molybdenum Oxide (Bloomberg) is $14.55; LME cash seller is $14.52, LME moly 3-month seller's contract is $14.52
Stock Market Morning Update
The DOW is up 77.04 points to 11,510.22; the S&P 500 is up 8.07 points at 1217.18
Miners are mixed:
Barrick (ABX) $53.41 up 1.02%
Newmont (NEM) $64.89 up 0.93%
US Gold (UXG) $5.96 up 2.05%
General Moly (Eureka Moly, LLC) (GMO) $3.82 up 2.14%
Thompson Creek (TC) $7.78 down 0.26%
Freeport-McMoRan (FCX) $42.68 up 0.33% (a bellwether mining stock spanning copper, gold & molybdenum)
Quadra FNX (TSE:QUX) $11.57 up 0.18%
Timberline Resources (TLR) $0.72 down 4.00%
The Steels are down (a "tell" for General Moly & Thompson Creek):
ArcelorMittal (MT) $18.86 down 0.74% - global steel producer
POSCO (PKX) $95.44 up 0.36% - South Korean integrated steel producer
The Eureka Miner's Grubstake Portfolio is up 0.83% at $1,596,324.57(what's this?).
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
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