Gold Drops to $1,535/oz Then Recovers; "Losses Enormous and Growing"

Global markets unhinged?

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

*** BREAKING NEWS *** The S&P 500 reversed this morning to the upside - up 13.83 points or 1.22% at 1,150.26; COMEX gold has fallen further to $1,601.3/oz (9:02 AM PDT)

This morning's...
COMEX Gold price = $1,618.1/oz (December contract most active)
Eureka Miner’s Gold Value Index© (GVI) = 105.22
Value Adjusted Gold Price© (VAGP) = $1,284.9/oz
COMEX - VAGP = $333.2/oz; gold is trading at a premium; key gold-referenced commodity ratios remain at recessionary levels (e.g., copper & oil)

Morning Miners!

It is 5:35 AM. Have a Monday cup of ether to get your diesel running. The global markets may need more than ether...

Gold Drops to $1,535/oz Then Recovers; "Losses Enormous and Growing"

Let's start the week with our favorite metal - COMEX gold dropped more than $100/oz in very early trading to see $1,535.0/oz. Fortunately, gold bounced back up above $1,600/oz and is presently trading at $1,618.1/oz. Ironically, gold is still doing better relative to key commodities and the Eureka Miner’s Gold Value Index© (GVI) is up From Friday's closing record of 104.6, currently posting 105.2 (see Daily Market Roundup below).

COMEX silver continues its downward spiral trading at $28.38/oz for a gold:silver (Au:Ag) ratio of 57.0. This is significant because ratio growth above the 50-56 range is a gauge of "hyper-fear" as silver positions are liquidated more aggressively than gold. After the Lehman Brothers bankruptcy, the gold:silver ratio soared into the 80s. Au:Ag will be very important to watch going forward.

COMEX copper is down some from Friday at $3.2450/lb but showing the earliest hints of stabilization. The gold:copper (Au:Cu)ratio nudged below 500 lb/oz at 498.6, a small improvement from Friday (a "normal" ratio in an unstressed market lies in the range of 300-400 lb/oz). To put this in some perspective, copper is 28% below the July closing price of $4.50/lb. At that time on July 29, gold closed at $1,631.2/oz, not too different from this morning's price. The Au:Cu ratio was then mid-range at 362 lb/oz - simply put, an ounce of gold in July bought 137 pounds more copper!

So what has caused all this calamity? Usual suspects: continued uncertainty in Europe and fears of a significant global slow-down. Hong Kong's Hang Seng Index fell to its lowest in more than two years, the Nikkei Stock Average lost 2.2% and Thailand's benchmark index fell an alarming 9%. Rising CME margin requirements put increased downward pressure on gold, silver and copper futures.

Kitco's Global Editor Debbie Carlson quoted Dennis Gartman as saying, "Never, in our 35 + years of watching, trading in, analyzing and commenting upon markets have we seen damage done such as this and the losses incurred are enormous and growing.” (Kitco Market Nugget, 8/26/2011).

Dennis Gartman is the editor/publisher of the "Gartman Letter" whose opinions are greatly respected by this report. According to the Kitco report, "Gold could see a short-term bottom at the $1,550-$1,560 an ounce area and a bounce could take prices back to $1,670-$1,700, but he [Gartman] expects selling to resume at that region."

Hang tight, 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 30.23, down from Friday's 33.96 and below the 1-month moving average of 94.37. Today sets a new low for 2010 and 2011, the old low was 33.96 set on September 23, 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 9/26/2011 (today) 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 105.22, up from Friday's closing 104.60 and above its 1-month average of 99.13. Today is a new record high for 2011 at 105.22 (Friday morning actually had a slightly higher number but we count the Friday close for record keeping). The Value Adjusted Gold Price© (VAGP) is $1,284.9/oz or $333.2/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 234.2 up from Friday's 222.7. 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 $79.22
ICE North Sea Brent crude $103.86
Spread (ICE- NYMEX) = $24.64(Friday, $25.19)

Here are the January contracts* with a narrower spread:

NYMEX light sweet crude $79.46
ICE North Sea Brent crude $101.65
Spread (ICE- NYMEX) = $22.19 (Friday, $22.64)

* 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 $0.63 in early trading at $79.22 (November contract, most active); Gold is down $21.7 to $1618.1 (December contract, most active); Silver is down $1.721 to $28.38 (December contract, most active); Copper is down $0.0350 at $3.2450 (December contract, most active)

Western Molybdenum Oxide (General Moly website) is $(not available); 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 62.55 points to 10,834.03; the S&P 500 is up 1.49 points at 1137.92

Miners are mixed:

Barrick (ABX) $46.57 up 0.32%
Newmont (NEM) $63.37 up 0.81%
US Gold (UXG) $4.51 unchanged
General Moly (Eureka Moly, LLC) (GMO) $2.92 down 0.68%
Thompson Creek (TC) $6.29 down 1.56%
Freeport-McMoRan (FCX) $31.98 down 1.20% (a bellwether mining stock spanning copper, gold & molybdenum)
Quadra FNX (TSE:QUX) $9.04 down 0.11%
Timberline Resources (TLR) $0.63 down 3.08%

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

ArcelorMittal (MT) $15.42 up 0.46% - global steel producer
POSCO (PKX) $77.21 down 0.92% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is down 0.94% at $1,301,837.35 (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