What's Up (or Down) with Silver?

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

*** BREAKING NEWS *** COMEX gold dropped to a $1,775.0/oz intraday low at 11:00 AM EDT; COMEX silver followed 20 minutes later at $39.400/oz

This morning's...
COMEX Gold price = $1800.0/oz (December contract most active)
Eureka Miner’s Gold Value Index© (GVI) = 96.56
Value Adjusted Gold Price© (VAGP) = $1,557.6/oz
COMEX - VAGP = $242.4/oz; gold is trading at a premium; key gold-referenced commodity ratios remain at recession levels (e.g., copper & oil)


Þūnresdæg
Morning Miners!

It is 5:58 AM. Have a cup of Thor's Distant Thunder. Our favorite Norseman has been busy loading up the pickup truck this morning with tarnished silver flagons. He and his Viking buddies nicked them in England back in the day. He got nervous when the Colonel warned him that silver prices might hit a soft spot - looks like a quick trip to the Reno pawn shops is in the cards for the ole thunderbolt thrower...

What's Up (or Down) with Silver?

This morning COMEX gold bumped down to a low of $1,779.7/oz as five major central banks dumped lots of U.S. dollars into the European banking system to prevent a new liquidity crisis. Gold is presently trading at an even $1,800.0/oz. This action will no doubt help Christine Lagarde, the managing director of the International Monetary Fund,  sleep better at night. She recently sent up warning flares on European bank liquidity  at the central bank get together in Wyoming (see Monday's report). It should also bring needed relief to global markets concerned about the health of finances in Europe. This will put downward pressure on gold but perhaps more on silver.

Debbie Carlson of Kitco News reported this morning that Dennis Gartman has turned bearish on silver:

Although he says he tends not to trade silver because it is more volatile than gold, newsletter editor Dennis Gartman says that volatility has dropped recently and “that entices us to the market.” He sees silver’s chart as turning bearish as a support line is broken, which makes him interested in potentially selling silver short. (Kitco News Nugget, 9/15/2011)

Let's see what the Commodity King is talking about. Here is a chart of COMEX silver price volatility and beta from last September to the present* ( a larger and more readable chart is given at the bottom of this blog page):

* volatility and beta are calculated over a 3-month moving window


Let's review a view definitions before we try to understand this plot. Volatility measures the price swings of one commodity relative to another; in this case, silver to gold. If the volatility or "VOL" is 1.0, we say the deviations in price from the mean are equal. For our case, if VOL is greater than 1.0 then silver price is more volatile than gold price - the normal state of affairs as Gartman notes.

In the above chart, VOL (blue line) is roughly 4.0 when silver made its highs last April implying that the price swings of silver were four times greater than gold. Gartman notes further that, "that volatility has dropped recently." On our chart, VOL dropped below 1.0 (black dotted line) in August and remains there which indicates gold price is now more volatile than silver.

There is a second metric that is important to understand. You may have heard silver described as a "high-beta" precious metal. Like VOL, beta tells us something about the character of one commodity in relation to another. In our example, beta measures the price sensitivity of silver with respect to gold. During the April highs the gold:silver beta was also close to 4.0 which says one can expect a 4% change in silver price for a 1% change in gold price.

Silver deserves its "high-beta" moniker because it normally has a beta greater than one. In an uptrend market for precious metals, this makes silver a good bet because it is typically a higher "percentage-gainer" than gold. Unfortunately, the same is true when fortunes reverse and price declines in silver are often calamitous compared to the more steadfast gold. This is the reason Dennis Gartman prefers lower-VOL, lower-beta commodities than silver to mange downside risk.

We can see, however, that the silver beta (like volatility) has dropped below 1.0 prompting Dennis Gartman's change in sentiment. He is apparently planning to "short" silver; a bet that silver prices will trend down in an orderly fashion. I hope this gives you some insight in what the the big players like Gartman watch when they trade precious metals. The ole Colonel plans to discuss this more fully in a upcoming article for Kitco News.


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 96.79, up from yesterday's 85.40 and below the 1-month moving average of 102.56. 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 96.56, down from yesterday's 98.20 and below its 1-month average of 98.53. The new record high for 2011, was set Tuesday, September 6th at 103.43. The Value Adjusted Gold Price© (VAGP) is $1,557.6/oz or $242.4/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 183.4 down from yesterday's 201.5. 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 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 $89.63
ICE North Sea Brent crude $115.7
Spread (ICE- NYMEX) = $26.07 (Yesterday, $22.59)

Here are the December contracts* with a narrower spread:

NYMEX light sweet crude $90.01
ICE North Sea Brent crude $111.67
Spread (ICE- NYMEX) = $21.66 (Yesterday, $18.55)

* 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 $110+ Brent and $90+ 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 $0.72 in early trading at $89.63 (October contract, most active); Gold is down $26.5 to $1800.0 (December contract, most active); Silver is down $0.338 to $40.195 (December contract, most active); Copper is down $0.0665 at $3.9645 (December contract, most active)

Western Molybdenum Oxide (Infomine) is $14.74; 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 153.94 points to 11,400.67; the S&P 500 is up 15.45 points at 1204.13

Miners are mixed:

Barrick (ABX) $52.33 down 0.70%
Newmont (NEM) $63.45 down 1.12%
US Gold (UXG) $6.05 down 2.26%
General Moly (Eureka Moly, LLC) (GMO) $3.70 unchanged
Thompson Creek (TC) $7.66 up 0.66%
Freeport-McMoRan (FCX) $41.98 up 0.65% (a bellwether mining stock spanning copper, gold & molybdenum)
Quadra FNX (TSE:QUX) $11.65 up 2.23%
Timberline Resources (TLR) $0.76 up 2.70%

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

ArcelorMittal (MT) $18.71 up 3.89% - global steel producer
POSCO (PKX) $95.01 up 1.52% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is down 0.27% at $1,585,738.59 (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