The Colonel's Friday Thoughts on Gold

Light at the end of the tunnel?

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

*** BREAKING NEWS *** COMEX gold is down $89.4 to $1,652.3/oz (10:12AM PDT); COMEX copper is trading at $3.2790/lb for a Au:Cu ratio of 505.1

This morning's...
COMEX Gold price = $1,690.9/oz (December contract most active)
Eureka Miner’s Gold Value Index© (GVI) = 105.36
Value Adjusted Gold Price© (VAGP) = $1,341.0/oz
COMEX - VAGP = $349.9/oz; gold is trading at a premium; key gold-referenced commodity ratios remain at recessionary levels (e.g., copper & oil)


Morning Miners!

It is 5:33 AM. Have a second cup of Raine's famous Red Label TGIF coffee. Looks like a second rocky market day with COMEX gold dropping another $50/oz to $1,690.9/oz and silver down $3.833 to $32.745.  Nuts,  I think we may be seeing a little light at the end of the I-80 tunnel...


The Colonel's input to the Weekly Kitco Gold Survey

Below is my weekly input to the Kitco gold survey. We may should see a relief rally in gold soon:

In the present market turmoil, there is a dash for liquidity with high correlation across most asset classes. Although COMEX gold has dropped precipitously, the yellow metal is actually doing quite well compared to copper, oil and silver on a relative basis (note 1). Today's gold value, as computed by the Eureka Miner’s Gold Value Index© (GVI), places it at a record premium to these commodities for 2010-2011 (note 2). There will be a market capitulation phase soon and gold will rise again in dollar price.

Note 1 - Most troubling is the present gold:copper ratio which broke 500 lb/oz this morning [500.78]; a more normal range is 300 to 400 lb/oz. During the Great Recession this ratio was in a range of 429 to 582 lb/oz during the banking scare of December 2008 and around 507 lb/oz for the S&P 500 bottom in March 2009.

Note 2 - Given historic norms, a gold price required to support copper, oil and silver prices is only $1,341.0/oz [i.e.Value Adjusted Gold Price (VAGP)] given this morning's gold price of $1,690.9/oz.

Here is an updated chart of the GVI to support my argument (a larger more readable plot is shown near the bottom of this blog page):

As you can see, we are presently at the top of both "high gold value" and volatility range.

Have a good weekend!


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 37.96, down from yesterday's 44.35 and below the 1-month moving average of 97.54. Today sets a new low for 2010 and 2011, the old low was 44.35 on September 22, 2011. The 1-month average is now below the 100-level putting us solidly in bear country..

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 new low set on 9/23/2011 (today) is 37.96. 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 105.36, up from yesterday's 103.80 and above its 1-month average of 98.90. Today is a new record high for 2011 at 105.36. The Value Adjusted Gold Price© (VAGP) is $1,341.0/oz or $349.9/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 220.4 up from yesterday's 218.0. Our benchmark is 100, a value of the DCI at a level above 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 $79.34
ICE North Sea Brent crude $104.53
Spread (ICE- NYMEX) = $25.19 (Yesterday, $25.03)

Here are the January contracts* with a narrower spread:

NYMEX light sweet crude $79.72
ICE North Sea Brent crude $102.36
Spread (ICE- NYMEX) = $22.64 (Yesterday, $222.08)

* 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 $75+ NYMEX in January favoring high oil prices throughout the late fall and early winter although we may see further pressure to the downside. 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 ORANGE light is turned on for Commodity Reflation with copper trading below $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 RED light is turned back on for Investor Confidence with investors very adverse to commodity-sensitive equities

The GREEN light is turned on our Fuel Gauge with oil below $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 $1.17 in early trading at $79.34 (November contract, most active); Gold is down $50.8 to $1690.9 (December contract, most active); Silver is down $3.833 to $32.745 (December contract, most active); Copper is down $0.1120 at $3.3765 (December contract, most active)

Western Molybdenum Oxide (General Moly website) is $14.50; European Molybdenum Oxide (Bloomberg) is $14.35; LME cash seller is $14.74, LME moly 3-month seller's contract is $14.74

Stock Market Morning Update

The DOW is down 73.45 points to 10,660.38; the S&P 500 is down 2.33 points at 1127.33

Miners are mixed:

Barrick (ABX) $47.35 down 2.89%
Newmont (NEM) $62.54 down 4.14%
US Gold (UXG) $4.74 down 3.46%
General Moly (Eureka Moly, LLC) (GMO) $2.82 unchanged
Thompson Creek (TC) $6.43 down 1.83%
Freeport-McMoRan (FCX) $32.60 up 1.43% (a bellwether mining stock spanning copper, gold & molybdenum)
Quadra FNX (TSE:QUX) $8.69 down 1.11%
Timberline Resources (TLR) $0.68 unchanged

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

ArcelorMittal (MT) $15.13 down 0.20% - global steel producer
POSCO (PKX) $77.32 down 0.90% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is down 2.48% at $1,337,670.45(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