Stormy Monday - The Red Metal Blues

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


This morning's (updated at 7:45 AM)...
COMEX Gold price = $1,785.4/oz (December contract most active)
Eureka Miner’s Gold Value Index© (GVI) = 99.70
Value Adjusted Gold Price© (VAGP) = $1,496.3/oz
COMEX - VAGP = $282.1/oz; gold is trading at a premium; key gold-referenced commodity ratios remain at recession levels (e.g., copper & oil)

Morning Miners!

It is 5:38 AM. Have a strong cup of Monday Reality, you may need it. The markets are singing the blues...

Stormy Monday - The Red Metal Blues

Let's start with a positive - COMEX gold is up $1.5 at $1,816.2/oz. That's it folks, everything else seems to be looking down the mineshaft this morning.

COMEX silver is down $0.526/oz at $40.305/oz and COMEX copper has dropped a sobering 3% to trade at $3.8125/lb for a 9-month low. For the old timers that still think $3/lb red metal is rich, I'll argue that a gold:copper ratio of 476.4 lb/oz is not rich. In fact, in my world any ratio over 400 lb/oz looks recessionary - the ole Colonel prefers to see gold:copper in a more normal 300-400 lb/oz range. On the worst day for the metals & miners last year, gold:copper hit 449 lb/oz and today we're above that. On the worst day during the Great Recession the ratio rose to 570 lb/oz and thankfully we've got a lot of headroom left before descending into that tight shaft of horror.

Whta's going on? You guessed it, Europe worries are pressing the headlines as Europe's leaders dither on additional aid for Greece. Bloomberg carries a nice overview on what this means for copper, other commodities and gold:

Commodities Drop, Paced by Copper, as Slowdown Concern Builds; Gold Rises (Tony C. Dreibus and Chanyaporn Chanjaroen, Bloomberg News - Sep 19, 2011 5:34 AM PT)

Oh-oh Gold just dropped $38

I just noted that COMEX futures dropped by $38.0/oz to $1,778.2/oz while I was writing the above thoughts on copper. Gold has since crawled back up to $1,785.4/oz and silver is below $40/oz at $39.545/oz. Copper has not got much help from gold's decline, falling itself to $3.7765/lb for a gold:copper ratio now at 472.8 (earlier, 476.4) and my thesis above remains intact. Gold price volatility is a topic of my upcoming Kitco article and today is another example. To give you sneak preview, here is a 1-year chart of the Eureka Miner’s Gold Value Index© (GVI):

You'll note that not only has gold reached a high value with respect to key commodities which include copper, it is also experiencing very high levels of price volatility. Read more about this very soon!

Update: just posted, Why is Gold More Volatile than Copper, Oil or Silver?

Strange times indeed.


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 87.20, down from Friday's 106.66 and above the 1-month moving average of 100.73. 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 99.70, up from Friday's 98.31 and below its 1-month average of 98.78. The new record high for 2011, was set Tuesday, September 6th at 103.43. The Value Adjusted Gold Price© (VAGP) is $1,496.3/oz or $282.1/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 185.3 up from Friday's 169.2. Our benchmark is 100, the value of the DCIan elevated level surpassing 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 $85.54
ICE North Sea Brent crude $109.39
Spread (ICE- NYMEX) = $23.85 (Friday, $24.61)

Here are the January contracts* with a narrower spread:

NYMEX light sweet crude $86.00
ICE North Sea Brent crude $107.73
Spread (ICE- NYMEX) = $21.73 (Friday, $22.70)

* 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 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 $2.64 in early trading at $85.54 (November contract, most active); Gold is down $29.3 to $1785.4 (December contract, most active); Silver is down $1.286 to $39.545 (December contract, most active); Copper is down $0.1550 at $3.7765 (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 231.82 points to 11,277.27; the S&P 500 is down 24.93 points at 1191.08

Miners are mixed:

Barrick (ABX) $53.92 up 0.63%
Newmont (NEM) $66.21 up 0.75%
US Gold (UXG) $5.61 down 6.19%%
General Moly (Eureka Moly, LLC) (GMO) $3.39 down 3.69%
Thompson Creek (TC) $7.31 down 4.07%
Freeport-McMoRan (FCX) $39.75 down 4.42% (a bellwether mining stock spanning copper, gold & molybdenum)
Quadra FNX (TSE:QUX) $10.86 down 2.89%
Timberline Resources (TLR) $0.73 down 2.67%

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

ArcelorMittal (MT) $17.47 down 5.57% - global steel producer
POSCO (PKX) $90.28 down 5.10% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is down 2.98% at $1,532,398.30(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