A Horrific Day for Miners

Fall Edition of the Mining Quarterly is now on-line!

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

This morning's...
COMEX Gold price = $1,737.0/oz (December contract most active)
Eureka Miner’s Gold Value Index© (GVI) = 103.80
Value Adjusted Gold Price© (VAGP) = $1,398.3/oz
COMEX - VAGP = $338.7/oz; gold is trading at a premium; key gold-referenced commodity ratios remain at recessionary levels (e.g., copper & oil)


Þūnresdæg
Morning Miners!

It is 5:39 AM. Have a fortifying cup of Thor's Thunder in Your Backyard. Our favorite Norseman is probably one of the few happy souls around today - he loves a storm of any kind. We wake to find ourselves in a global market sell-off with the mining sector being one of the hardest hit sectors. In a nutshell, the world market reaction is twofold: 1) disappointment in the Federal Reserve's downbeat assessment for global growth and lack of any significant monetary stimulus ("Operation Twist" does not expand their balance sheet), and 2) new PMI data indicates a third month of contraction in the Chinese manufacturing sector against a growing backdrop of inflation. The venerable Art Cashin declared from the floor of the NYSE that the morning news and sell-off was the failure of the "third leg of the trouble stool."

The three legs of the other stool fail too...

A day when COMEX gold drops $71.1/oz is bad enough until you realize that gold is actually doing quite well compared to copper, oil and silver. We are witnessing a "crash" in copper prices nearly touching the $3.50/lb level at $3.5180/lb, a drop of nearly 7% in one day. Again, for the old timers that think anything above $3.00/lb is rich, the morning's copper:gold is nearly at 500 lb/oz, presently marking 494 lb/oz. In early December 2008, arguably the worst day for miners during the Great Recession, the ratio hit 573 lb/oz - we're not too far away, pardner.

NYMEX Oil is down $5.40/bbl at $80.52/bbl, a significant daily correction to the downside. The oil:gold ratio is 21.6 bbl/oz, actually a tad higher than 21.3 bbl/oz scored on that dark December 2008 day. Any ratio above 20 bbl/oz is recessionary in my books.

COMEX silver which has been riding in the saddle fairly well with gold took a hit today too. It is presently at $37.055/oz and the closely watched gold:silver ratio has broke out of the 39-46 oz/oz range since early May almost touching nearly 47 at 46.88 oz/oz. A rising ratio indicates weakness with respect to gold.

Copper, oil and silver are the three legs of our Eureka Miner’s Gold Value Index© (GVI) stool. With notable declines in all three, the GVI is actually setting a new high for 2011 at 103.8. A value of 100 represents a "high-value" of gold with respect to these key commodities (see Daily Market Roundup below).

A Horrific Day for Miners

For Eurekans, let's put it simply: a day that starts with Barrick Gold (ABX) down 8% and General Moly (GMO) falling below $3/share is not a great day. In fact, the Eureka Miner's Index© (EMI) has set not only a new low for 2011, but a new low since its inception last year. Presently the EMI plumbs 44.35 - on the worst day for miners last year (June 7, 2010), the EMI was 50.67. So much for the August 9, 2011 low of 74.53. Even more troubling, today marks the first day the EMI 1-month moving average is below the key 100-level putting us solidly in bear country (see Daily Market Roundup below).

Ending on a positive...

Ending on a positive, Mining Editor Adella Harding's Fall edition of the Mining Quarterly is now posted on-line. I've had my hard copy for several weeks; if you haven't seen her fine work - checkout the online version. There's lots of good information on Goldstrike, Newmont's latest underground mines, Hycroft, Jerrit Canyon and updates on the latest exploration drilling.

Remember - even if gold price is down, gold value is up and that's not all bad in Nothern Nevada's gold country!


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 44.35, down from yesterday's 83.74 and below the 1-month moving average of 99.35. Today sets a new low for 2010 and 2011, the old low was 50.67 on June 7, 2010. 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 9/22/2011 (today) is 44.35. 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 103.80, up from yesterday's 100.50 and above its 1-month average of 98.73. today is a new record high for 2011 at 103.80. The Value Adjusted Gold Price© (VAGP) is $1,398.3/oz or $338.7/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 218.0 up from yesterday's 178.3. 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 $80.52
ICE North Sea Brent crude $105.55
Spread (ICE- NYMEX) = $25.03 (Friday, $24.65)

Here are the January contracts* with a narrower spread:

NYMEX light sweet crude $81.00
ICE North Sea Brent crude $103.08
Spread (ICE- NYMEX) = $22.08 (Friday, $21.61)

* 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 YELLOW light is turned on for Commodity Reflation with copper trading dangerously close to $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 down $5.40 in early trading at $80.52 (November contract, most active); Gold is down $71.1 to $1737.0 (December contract, most active); Silver is down $3.414 to $37.055 (December contract, most active); Copper is down $0.2460 at $3.5180 (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 371.75 points to 10,753.09; the S&P 500 is down 38.48 points at 1128.28

Miners are down the mineshaft:

Barrick (ABX) $49.07 down 7.97%
Newmont (NEM) $64.61 down 4.54%
US Gold (UXG) $5.04 down 7.69%
General Moly (Eureka Moly, LLC) (GMO) $2.87 down 8.60%
Thompson Creek (TC) $6.41 down 7.64%
Freeport-McMoRan (FCX) $32.34 down 9.13% (a bellwether mining stock spanning copper, gold & molybdenum)
Quadra FNX (TSE:QUX) $8.73 down 6.74%
Timberline Resources (TLR) $0.70 down 14.63%

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

ArcelorMittal (MT) $15.20 down 7.65% - global steel producer
POSCO (PKX) $79.22 down 6.73% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is down 6.74% at $1,387,106.22(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 courtesy of the Elko Daily Free Press

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