Gold, Copper, Oil, Silver Bounce on the "Big Plan"

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

This morning's...
COMEX Gold price = $1,654.3/oz (December contract most active)
Eureka Miner’s Gold Value Index© (GVI) = 100.77
Value Adjusted Gold Price© (VAGP) = $1,371.8/oz
COMEX - VAGP = $282.5/oz; gold is trading at a premium; key gold-referenced commodity ratios remain at recessionary levels (e.g., copper & oil)


Morning Miners!

It is 6:16 AM. Have a cup of Ruby T's Bull Rider java. Nothing like old Ruby to rally the markets after a brutal start yesterday. There she goes whistling "Blue Skies"...

Gold, Copper, Oil, Silver Bounce on the "Big Plan"

If you are skeptical that the problems of Europe don't affect this report's favorite metals, today should make you a believer. Yesterday afternoon, just the rumor that a "Big Plan" was on the drawing boards to save Europe from a spiraling debt crisis was enough to rally the broader markets and the metals complex. The "Big Plan" is expected to include potential expansion of the European Financial Stability Facility as well as plans for the European Union to aggressively recapitalize its banks. Some of this enthusiasm is tempered by the plan's use of leverage which will no doubt increase the associated credit risk and possible credit downgrades for a few of the euro-zone guarantors. A lot of little devils in those details but as Ruby T says, "A rally is a rally, let Old Miner Woden worry the details!"

Copper perked up and this morning is enjoying a 4% bounce off its 14-month low. NYMEX oil is up several bucks which makes some cringe until you remember that oil, like copper, is a reliable proxy for global growth. Oil climbing back into $80/bbl territory is just fine with me if it signals we may miss a global contraction. Even COMEX gold and its beleaguered companion silver are feeling good today regaining ground - presently trading at $1,654.3/oz and $32.585/oz respectively. Silver comes off a 10-month low and the closely watched gold:silver ratio has departed from "hyper-fear" levels (57 oz/oz and higher) to a much more normal 50.8 oz/oz.

The metals & miners do best when all the metals move together in a positive direction. The broader markets are now open and it looks like a dandy day for the miners too. General Moly (GMO) is back above $3, Barrick Gold (ABX) and Timberline resources are up 3% and US gold has a gain of 5%.

The best news for the ole Colonel...

The best news for the ole Colonel wasn't the "Big Plan" but a report yesterday by CNBC Business News that Bill O'Neill of Logic Advisors was considering buying copper and oil. At the time of that news, copper and oil were up slightly but hadn't caught this morning's fire. Why is this announcement important?

The Eureka Miner’s Gold Value Index© (GVI) establishes a value for gold relative to key commodities copper, oil and silver. This has proven to be an important tool for determining buy/sell and accumulate/reduce decisions. The GVI theory is to buy gold at the bottom of gold value cycles when you are confident that gold value and price will soon rise together

Bill O'Neill of Logic Advisors and Dennis Gartman of the Gartman Letter bought gold within a day of each other (April 20-21, 2011) shortly after the gold value low (GVI, April 11, 2011) as discussed in my August 22 Kitco commentary.

Th flip-side to this approach is that it should also make sense to buy copper and oil when gold is at the top of the value cycle and there is evidence that the prices of the red metal and oil are ready to move higher. Here is a 1-year plot of the GVI (a larger more readable chart is shown near the bottom of the blog page):

As this report has mentioned before, we find ourselves in a period of high gold value and volatility. Although gold dollar price has declined substantially, gold has maintained its value. From this plot we moved from a 2011 high yesterday (105.2) to near mid-range of the volatility (100.8) and very close to the 1-month moving average of 99.47. We will watch the next few weeks to see if Bill O'Neill has made the right bet supporting the "flip-side" GVI theory. Copper giant Freeport-McMoRan (FCX) has bounced nearly 6% in early morning trading - a good sign for Mr. O'Neill and the GVI too.


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 53.05, up from yesterday's 30.23 and below the 1-month moving average of 92.54. 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 9/26/2011 is 30.23. 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 100.77, down from yesterday's record 105.22 and above its 1-month average of 99.47. The Value Adjusted Gold Price© (VAGP)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 201.1 down from yesterday's 234.2. 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 $82.34
ICE North Sea Brent crude $105.31
Spread (ICE- NYMEX) = $22.97 (Friday, $24.64)

Here are the January contracts* with a narrower spread:

NYMEX light sweet crude $82.60
ICE North Sea Brent crude $103.48
Spread (ICE- NYMEX) = $20.88 (Friday, $22.19)

* 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 $80+ 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 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 $2.10 in early trading at $82.34 (November contract, most active); Gold is up $59.5 to $1654.3 (December contract, most active); Silver is up 2.609 to $32.585 (December contract, most active); Copper is up $0.1565 at $3.4375 (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 up 216.76 points to 11,260.62; the S&P 500 is up 25.61 points at 1188.56

Miners are mixed:

Barrick (ABX) $48.80 up 2.98%
Newmont (NEM) $65.79 up 2.17%
US Gold (UXG) $4.78 up 5.05%
General Moly (Eureka Moly, LLC) (GMO) $3.10 up 3.68%
Thompson Creek (TC) $6.95 up 7.59%
Freeport-McMoRan (FCX) $35.71 up 5.74% (a bellwether mining stock spanning copper, gold & molybdenum)
Quadra FNX (TSE:QUX) $9.79 up 5.26%
Timberline Resources (TLR) $0.66 up 3.13%

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

ArcelorMittal (MT) $16.79 up 4.81% - global steel producer
POSCO (PKX) $81.20 up 4.18% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is down 4.35% at $1,389,158.90 (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