"The history of Eureka lies in its future." - Lambert Molinelli, 1878


The author/editor of the Eureka Miner owns common shares of local mining stocks, General Moly (GMO) and Newmont Mining (NEM); together with benchmark miner Freeport-McMoRan (FCX). Please do your own research, markets can turn on you faster than a feral cat.

Tuesday, October 4, 2011

Gold Price Steady; Gold Value New Record - Welcome to Bear Country

Gold at peak value?

My latest Kitco Commentary:
What is the Value of Gold? India Beckons (10/03/2011)

*** BREAKING NEWS *** COMEX gold & silver took a sharp turn down trading at $1,603.2/oz and $29.010/oz respectively (12:37 PM PDT) COMEX copper is $3.0525/lb remaing above the key $3/lb level.

This morning's...
COMEX Gold price = $1,652.5/oz (December contract most active)
Eureka Miner’s Gold Value Index© (GVI) = 109.97 (new record high)
Value Adjusted Gold Price© (VAGP) = $1,255.6/oz
COMEX - VAGP = $395.9/oz; gold is trading at a premium; gold:copper & gold:oil ratio are at recessionary levels

Morning Miners!

It is 5:34 AM. Have a hot cup of Ruby Red. Sweet Ruby T is on the war path this morning, pardner. Our indomitable market bull has been in lonely pasture lately with everything heading south for a cold winter in the markets.

"Don't believe all that hooey Colonel! OK, my favorite metal copper broke 3-bucks yesterday but its back above $3 today. Durn it, there's still a 250,000 tonne deficit projected for next year!"

You've got to admire that old gal's fighting spirit...

Gold Price Steady; Gold Value New Record

This report tracks gold U.S. dollar price and also its value compared to a basket of key commodities. This morning, COMEX gold is down $5.2/oz at $1,652.5/oz as the U.S. dollar soars to a 9-month high on escalating fears of imminent Greek default and one or more European bank failures. Importantly, gold valve as measured by the Eureka Miner’s Gold Value Index© (GVI) is at a new record high of 109.97. A value of 100 denotes "high-value" and we're 10% above that.

What does that mean? We can take the GVI and adjust current gold price to see how it compares with other commodities. The resulting Value Adjusted Gold Price (VAGP) is a level that supports current oil, copper & oil prices based on historical commodity norms. This morning's $1,652.5/oz gold adjusts to a lowly $1,255.6/oz - a record premium of $395.9/oz! Some of us remember when the $400/oz was a pretty decent price of gold, now its a measure of the value difference between the yellow metal and its beleaguered companions in the commodity space. It's still good to live in a gold town in hard times even though dollar price is down - now, don't you feel a little better?

Here is a chart of the GVI from last September to this morning's number:

We hit a gold value low of 67.68 on April 11 when commodity inflation was near a peak (e.g., high oil & silver prices, copper peaked in February). Amazingly, gold value has increased 62.5% from this spring for only a 12.5% increase in dollar price (ref: April 11 morning COMEX prices).

My colleague, Sumeru Sala, is an active gold & silver trader in Mumbai, India. Presently, India has the highest consumer demand for gold in the entire world. Recently, we developed a gold value index for India and the reuslts were quite interesting compared to what we're experiencing in the western world. You can read about this transcontinental collaboration in my latest Kitco commentary
What is the Value of Gold? India Beckons.

Welcome to Bear Country

Hold on to your gold as you take a look out the broader market window. Yes, my friends we are now in official bear country. By the numbers, the S&P 500 needed to drop below 1,096 to meet the "20% down" from this year's high water mark of 1,370.58 (intraday high on May 2,2011) to meet a common definition for new bear markets (Some folks use the closing high for the S&P 500, which was 1,362.84 April 29, 2011, setting the bear country gate at 1,090)

There are those who will argue that we've never really left the last bear market initiated by Lehman Brother's collapse - we just had a "nice bull-run in a secular bear market." Whatever your viewpoint, it is a serious time for markets. The S&P raced past the 1,096 (or 1,090) goal posts after the open and by 6:56 AM PDT it touched 1,074.77 before rebounding a bit to the present 1,075.71

Of course, the mining sector has been in bear country for quite sometime - the other kids are just catching up. Keep your hands inside the window and don't feed the bears. Ruby brought some sandwiches along for lunch in the car.

General Moly (GMO) is presently $2.10, Barrick Gold is $44.98. The Eureka Miner's Index© (EMI) has just posted a new low for the year...

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 22.88, down from yesterday's 29.83 and below the 1-month moving average of 77.38. This is a new record low for 2010-2011. The 1-month average is currently below the 100-level putting us solidly in bear country.

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 new low set on 9/30/2011 is 28.66. 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 109.97, up from yesterday's 109.50 and above its 1-month average of 101.47. This is a new record high for 2010-2011. The Value Adjusted Gold Price© (VAGP) is $1,255.6/oz which is $395.9/oz below the current COMEX gold price.

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 264.9 up from yesterday's 248.6. Our benchmark is 100, a value of the DCI at a level above 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 $75.88
ICE North Sea Brent crude $100.09
Spread (ICE- NYMEX) = $24.21 (last report, $23.93)

Here are the January contracts* with a narrower spread:

NYMEX light sweet crude $76.25
ICE North Sea Brent crude $96.92
Spread (ICE- NYMEX) = $20.67 (yesterday, $20.89)

* 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 $95+ Brent and $75+ NYMEX in January favoring stabilizing 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 $51.92 (our new key level, 09/21 update); 10-year Treasurys are safely below 4% preserving a low-interest rate environment.

The ORANGE light is turned on for Commodity Reflation with copper trading below $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 RED light is turned back on for Investor Confidence with investors very adverse to commodity-sensitive equities

The GREEN light is turned on our Fuel Gauge with oil below $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 $1.73 in early trading at $75.88 (November contract, most active); Gold is down $5.2 to $1652.5 (December contract, most active); Silver is down $0.380 to $30.415 (December contract, most active); Copper is down $0.0545 at $3.0960 (December contract, most active)

Western Molybdenum Oxide (General Moly website) is $14.00; European Molybdenum Oxide (Bloomberg) is $13.95; LME cash seller is $14.06, LME moly 3-month seller's contract is $14.06

Stock Market Morning Update

The DOW is down 234.61 points to 10,420.69; the S&P 500 is up 23.52 points at 1075.71

Miners are down:

Barrick (ABX) $44.98 down 2.66%
Newmont (NEM) $62.19 down 1.71%
US Gold (UXG) $3.51 down 6.40%
General Moly (Eureka Moly, LLC) (GMO) $2.10 down 11.39%
Thompson Creek (TC) $5.53 down 3.32%
Freeport-McMoRan (FCX) $29.38 down 1.64% (a bellwether mining stock spanning copper, gold & molybdenum)
Quadra FNX (TSE:QUX) $7.32 down 4.55%
Timberline Resources (TLR) $0.53 down 5.36%

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

ArcelorMittal (MT) $15.26 down 1.55% - global steel producer
POSCO (PKX) $71.92 down 0.81% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is down 3.12% at $1,187,370.01 (what's this?).


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 photo by Mariana Titus

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

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