Something Strange Is Going On Here...

ελληνικός καφές

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

This morning's...
COMEX Gold price = $1,841.8/oz (December contract most active)
Eureka Miner’s Gold Value Index© (GVI) = 100.21
Value Adjusted Gold Price© (VAGP) = $1,535.7/oz
COMEX - VAGP = $306.1/oz; gold is trading at a premium; key gold-referenced commodity ratios remain at recession levels (e.g., copper & oil)

Morning Miners!

It is 5:41 AM. Have a cup of ελληνικός καφές. That's Greek for Greek Coffee. If that's all Greek to you, don't feel alone. The global markets are sipping some strange brew lately too trying to figure out what's in the latest Trojan Horse...

Something Strange Is Going On Here...

Not much has really changed from Friday. There are still rumors flying around that Greece is facing imminent default on their sovereign debt and this has global markets in a roil. This morning 17 out of 19 world stock markets are in the red, some seriously. Greece is not really "new" news; economists have known for many months that Europe's profligate peripheral could never work its way out of a mountain of debt. However, European leaders and bankers are some of the best can kickers in the world and the Greek debt default can has been kicked more than a World Cup football since early last year when their sovereign debt issues first emerged (note 2).

The real problem is a growing awareness that European banks may not be able to absorb a Greek default shock and subsequent contagion to other debt-laden neighbors. The ole Colonel is still haunted by Christine Lagarde's desperate pleas to shore up Europe's banking sector at the recent central bankers get together in Wyoming. She is the new managing director of the International Monetary Fund(IMF) but was formerly France's Minister of Finance. Presumably she knows what skeletons are in the castle closets and can now speak more candidly having stepped up from can kicker to global financial savior. To complete this cliche-ridden overview, I'm reminded of the refrain from that famous children's fable, "All the king's horses and all the king's men (and all the IMF saviors) couldn't put Humpty together again."

OK, enough. What does all this euro-worry do to the metals & miners? This morning copper, tin and zinc hit 1-month lows which doesn't sound that bad until you remember that August was the worst month of 2011 for our base metal friends.

COMEX copper is presently trading at $3.9405/lb and Brent Oil is sitting at $111.6/bbl. So what? We've been at these levels before. Neither copper or oil, both proxies for global growth, have experienced calamitous declines. Here is the oddity: gold has been more volatile than either copper or oil since early August. The ole Colonel cannot remember seeing this happen in recent memory. I checked my records back to the first market day in 2009 and couldn't find a similar situation. That covers some of the worst days for for global stock markets (S&P 500 bottom was in March, 2009) during the latter stages of the Great Recession.

Something strange is going on here. Gold-referenced commodity ratios are already at recession levels and the reference is bouncing around like another metaphorical tin can in Europe. The scary thing for me is that I don't know what this portends for world markets. I do know that our metals, both precious and base, are telling us something very important. Stay tuned, we'll figure this riddle out together.


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 85.59, down from Friday's 93.00 and below the 1-month moving average of 103.41. 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.

Here is a chart of the EMI through Friday's close (a larger more readable plot can be found near the bottom of the blog page):

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 above-par at 100.21, down slightly from Friday's 100.22 and above its 1-month average of 98.43. 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.

Here is a chart of the GVI through Friday's close (a larger more readable plot can be found near the bottom of the blog page):

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.

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 219.2 up from Friday's 202.1. 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 $86.94
ICE North Sea Brent crude $111.66
Spread (ICE- NYMEX) = $24.72 (Yesterday, $25.56)

Here are the December contracts* with a narrower spread:

NYMEX light sweet crude $87.31
ICE North Sea Brent crude $108.71
Spread (ICE- NYMEX) = $21.40 (Yesterday, $22.99)

* 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 down $0.30 in early trading at $86.94 (October contract, most active); Gold is down $7.2 to $1850.3 (December contract, most active); Silver is down $0.629 to $40.995 (December contract, most active); Copper is down $0.0620 at $3.9405 (December contract, most active)

Western Molybdenum Oxide (Infomine) is $14.74; European Molybdenum Oxide (Bloomberg) is $14.62; LME cash seller is $14.52, LME moly 3-month seller's contract is $14.52

Stock Market Morning Update

The DOW is down 35.38 points to 10,956.75; the S&P 500 is down 1.70 points at 1152.53

Miners are mixed:

Barrick (ABX) $54.55 unchanged
Newmont (NEM) $64.39 down 1.33%
US Gold (UXG) $6.24 up 1.79%
General Moly (Eureka Moly, LLC) (GMO) $3.62 up 0.56%
Thompson Creek (TC) $7.78 down 1.14%
Freeport-McMoRan (FCX) $41.84 down 0.36% (a bellwether mining stock spanning copper, gold & molybdenum)
Quadra FNX (TSE:QUX) $11.82 down 1.75%
Timberline Resources (TLR) $0.76 down 5.00%

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

ArcelorMittal (MT) $17.42 down 1.91% - global steel producer
POSCO (PKX) $93.58 down 0.87% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is down 0.53% at $1,598,036.13 (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