On the Other Hand, Maybe the Worst Is Over

My latest Kitco Commentary: The Copper-Gold Conundrum (9/6/2011)

This morning's...
COMEX Gold price = $1,825.2/oz (December contract most active)
Eureka Miner’s Gold Value Index© (GVI) = 97.81
Value Adjusted Gold Price© (VAGP) = $1,559.2/oz
COMEX - VAGP = $266.0/oz; gold is trading at a premium; key gold-referenced commodity ratios remain at recession levels (e.g., copper & oil)


Morning Miners!

It is 5:35 AM. Have a rewarding cup of Eternal Optimism. It's hard to feel blue when our market bull pulls into town, especially on a day when gold and copper prices are higher in morning trading. Sweet Ruby T just has a knack for bringing a lot of good cheer into the break room...

On the Other Hand, Maybe the Worst is Over

Yesterday on CNBC Business News, Carter Worth, Chief Market Technician for Oppenheimer Asset Management Inc., outlined on a graph of the S&P 500 why the highs and the lows were in for the year. Hey, I'll take that - avoiding the lows of August 9th at the expense of not seeing the April 25th closing high of 1,362.84 seems like a fair trade to me. Ruby agrees but says her buddy Carter would look a whole lot better in Wranglers.

August 9th was also the date that the Eureka Miner's Index© (EMI) made its 2011 low of 74.53. This morning the EMI is 84.48, too close for comfort but the 1-month average is still showing daylight above the key 100-level at 103.65. This report's DCI is still above the 200-scary-level but just by a thin flat washer at 205.4. On August 9th, the DCI peaked at a whopping 271.0 (see the Daily Market Roundup below for further discussion of the EMI & DCI).

Everything pivots on some improvement in the European sovereign debit crisis. Presently, 16 of 19 global markets are in the green including the S&P 500 so something must look better than yesterday when the score was only 2 up in 19. There have been rumors that China may come to the rescue of Italy, and German and French leaders might provide some sort of support to debt-laden Greece. All a big puzzle with the options remaining resulting in a situation that is somewhat better or a whole lot worse. I think "somewhat better" gets the miners above the 100-mark fairly quickly; and the DCI, below 200. The latter darker option has some analysts, talking about a S&P 500 of 950 by year's end. Nuts, Ruby & the ole Colonel will take Carter Worth's opinion any day. Send that boy a pair of Wrangler Original Fits.

COMEX gold is standing up eleven-and-change at $1,825.2/oz; COMEX copper is struggling to bust $4, up a a penny-and-a-half at $3.9805/lb. COMEX silver is healthy at $40.645/oz and the LME molybdenum 3-month seller is holding ateady at $14.74/lb.

Cheer up and enjoy your Tuesday!


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 84.48, down from yesterday's 85.59 and below the 1-month moving average of 103.65. 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.

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 97.81, down from yesterday's 100.21 and below its 1-month average of 98.36. The new record high for 2011, was set Tuesday, September 6th at 103.43. The Value Adjusted Gold Price© (VAGP) is $1,535.7/oz or $306.1/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.

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 205.4 up from yesterday's 219.2. 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 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 $89.24
ICE North Sea Brent crude $112.23
Spread (ICE- NYMEX) = $22.99 (Yesterday, $24.72)

Here are the December contracts* with a narrower spread:

NYMEX light sweet crude $89.49
ICE North Sea Brent crude $108.92
Spread (ICE- NYMEX) = $19.43 (Yesterday, $21.40)

* 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 $100+ 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 up $1.05 in early trading at $89.24 (October contract, most active); Gold is up $11.9 to $1825.2 (December contract, most active); Silver is up $0.428 to $40.645 (December contract, most active); Copper is up $0.0620 at $3.9805 (December contract, most active)

Western Molybdenum Oxide (Infomine) is $14.74; European Molybdenum Oxide (Bloomberg) is $14.62; LME cash seller is $14.74, LME moly 3-month seller's contract is $14.74

Stock Market Morning Update

The DOW is up 44.95 points to 11,106.07; the S&P 500 is up 8.40 points at 1170.67

Miners are mixed:

Barrick (ABX) $52.63 down 1.31%
Newmont (NEM) $62.88 down 1.86%
US Gold (UXG) $6.17 down 1.12%
General Moly (Eureka Moly, LLC) (GMO) $3.61 down 0.55%
Thompson Creek (TC) $7.73 up 0.78%
Freeport-McMoRan (FCX) $41.37 up 0.15% (a bellwether mining stock spanning copper, gold & molybdenum)
Quadra FNX (TSE:QUX) $11.54 up 1.33%
Timberline Resources (TLR) $0.73 unchanged

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

ArcelorMittal (MT) $17.63 up 1.15% - global steel producer
POSCO (PKX) $93.65 down 0.59% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is unchanged at $1,582,124.39 (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 photograph by Mariana Titus

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