A Rustler's Moon Returns

painting by Larry Edgar

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


This morning's...
COMEX Gold price = $1,782.6/oz (December contract most active)
Eureka Miner’s Gold Value Index© (GVI) = 99.33
Value Adjusted Gold Price© (VAGP) = $1,499.5/oz
COMEX - VAGP = $283.1/oz; gold is trading at a premium; key gold-referenced commodity ratios remain at recessionary levels (e.g., copper & oil)


Morning Miners!

It is 5:42 AM. Have a hot cup of Rustler's Moon java. Ruby T has a small photocopy of Western artist Larry Edgar's "Rustler's Moon" taped to the cab roof of her 379 Pete. She likes to look at it when she pulls her CB mike which is just a few inches away. The cowboy in the painting is Jack Bliss, a notorious rustler, who operated in Northern Wyoming in the early 1890s. Her Pa was from those parts so it is comforting for Ruby to have a bit of Wyoming history nearby. Jack Bliss was product of an economically depressed area caused by the severe winter of 1886-1887, and took to the outlaw trail like many cowboys of that era. Sounds all too familiar lately...

A Rustler's Moon Returns

The Colonel first featured "Rustler's Moon" as a headline photo of the December 2, 2010 report. Tonight will bring the sliver of a rustler's moon (just enough light to steal but not enough to be caught) so I thought it would be interesting to compare then and now.

Ironically 9 1/2 months ago, oil and copper prices were about the same within a few cents but gold and silver prices were quite a bit lower:

NYMEX Oil $86.55/bbl (12/2/2010) $86.34/bbl (9/20/2011)
COMEX copper $3.9455/bbl (12/2/2010) $3.7845/bbl (9/20/2011)

COMEX gold $1,390.4/oz (12/2/2010) $1,782.6/oz (9/20/2011)
COMEX silver $28.480/oz (12/2/2010) $39.434/oz (9/20/2011)

Market sentiment was high then with copper prices rising and the metals & miners closed the year with a bang. By the morning of New Year's Eve COMEX copper was sitting at $4.4150/lb. On the first market day of 2011 the Eureka Miner's Index© (EMI) hit 816.78 and it's been pretty much downhill ever since. Today the EMI is at a discouraging 90.39 and below the key 100-level which marks the boundary between cold and hot markets for the metals & miners. Only the large-cap gold miners have done well lately.

Although oil and copper prices are nearly the same, their ratio with gold is not. Lets do another comparison:

Au:Oil ratio 16.1 bbl/oz (12/2/2010) 20.7 bbl/oz (9/20/2011)
Au:Cu ratio 352 lb/oz (12/2/2010) 471 lb/oz (9/20/2011)

If you believe that gold is the ultimate arbitrator of value in the commodity space, the recent ratios are disturbing. This report considers a "normal" Au:Oil ratio to be somewhere in the 14-18 bbl/oz range and anything above 20 to be a recessionary level. Barrick Gold's CEO Aaron Regent in the past has used a historical ratio of 17 to argue that gold prices are not excessive. In early December of 2008, arguably the worst day of the Great Recession for metals and miners, the Au:Oil ratio was 21.3 bbl/oz and today we are only 3% below that number.

For the Au:Cu ratio, the normal range is 300-400 lb/oz with anything north of 400 lb/oz signalling trouble. From the above numbers, early December 2010 was in the middle of the normal range at 352 lb/oz; today it is notably above at 471 lb/oz. In early December of 2008 the ratio stood at a startling 573 lb/oz. There is still a ways to go for copper - at today's gold price that elevated ratio would give us $3.11/lb copper.

As measured by the Eureka Miner’s Gold Value Index© (GVI), gold was undervalued with respect to oil, copper and silver in December 2010; today it is trades at a considerable premium to those key commodities. The former GVI was 81.39 on the comparison date and 99.33 this morning. The 100-level marks a high gold-value; the market norm is 83.56.

Adjusting gold price with the GVI gives us the Value Adjusted Gold Price (VAGP). Interestingly, although gold prices are nearly $400/oz higher today, the VAGPs for both dates are much closer: $1,427.4/oz then and $1,499.5/oz now - a difference of only $72!

A lot to contemplate. I wonder where we will be this December, pardner. Stay tuned.



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 90.39, up from yesterday's 85.56 and below the 1-month moving average of 100.86. 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 99.33, down from yesterday's 99.97 and above its 1-month average of 98.77. The new record high for 2011, was set Tuesday, September 6th at 103.43. The Value Adjusted Gold Price© (VAGP) is $1,499.5/oz or $283.1/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 170.7 down from yesterday's 185.3. Our benchmark is 100, a value of the DCI at a level above 200 is time for serious concern. We are now below 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 $86.34
ICE North Sea Brent crude $110.08
Spread (ICE- NYMEX) = $23.74 (Friday, $23.85)

Here are the January contracts* with a narrower spread:

NYMEX light sweet crude $86.92
ICE North Sea Brent crude $108.17
Spread (ICE- NYMEX) = $21.25 (Friday, $21.73)

* 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 $85+ NYMEX in December favoring high oil prices throughout the late fall and 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 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 $0.53 in early trading at $86.92 (November contract, most active); Gold is up $3.7 to $1782.6 (December contract, most active); Silver is up $0.267 to $39.430 (December contract, most active); Copper is up $0.0020 at $3.7845 (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 up 17.79 points to 11,418.80; the S&P 500 is up 2.54 points at 1206.63

Miners are mixed:

Barrick (ABX) $53.32 down 0.19%
Newmont (NEM) $66.98 up 1.07%
US Gold (UXG) $5.61 unchanged
General Moly (Eureka Moly, LLC) (GMO) $3.32 down 2.35%
Thompson Creek (TC) $7.42 down 0.80%
Freeport-McMoRan (FCX) $39.75 down 1.17% (a bellwether mining stock spanning copper, gold & molybdenum)
Quadra FNX (TSE:QUX) $10.92 down 1.72%
Timberline Resources (TLR) $0.73 down 1.35%

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

ArcelorMittal (MT) $17.33 down 1.59% - global steel producer
POSCO (PKX) $89.84 down 1.33% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is down 0.55% at $1,532,926.42(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 image - "Rustler's Moon" a Larry Edgar painting of Jack Bliss, a notorious rustler, who operated in Northern Wyoming in the early 1890s. He was a product of the economically depressed area, caused by the severe winter of 1886-1887 and took to the outlaw trail like many cowboys of that era.

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