Mer-Kozy Rally - Miners Up; Gold Price Up, Value Down

The Big Picture

My Latest International Business Times commentary: What is Up (or Down) with Silver and Gold?
(10/6/2011)

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

This morning's...
COMEX Gold price = $1,667.0/oz (December contract most active)
Eureka Miner’s Gold Value Index© (GVI) = 101.98
Value Adjusted Gold Price© (VAGP) = $1,365.9/oz
COMEX - VAGP = $301.1/oz; gold is trading at a premium; key gold-referenced commodity ratios are at recessionary levels (e.g., copper & oil)

Morning Miners!

It is 5:32 AM. Have a hot Monday cup of Euro-Bliss, it was warmed up over the weekend. German Chancellor Angela Merkel and French President Nicolas Sarkozy on Sunday said they have the beginnings of a new plan to save Europe from the sovereign debt crisis. It will include recapitalization for some European banks and better budget policy coordination within the the 17 euro-zone countries that share the euro as a common currency. Unfortunately, the new "Mer-Kozy" initiative offers few details - more to come later this month.

Why does a mining market report even care? Because, Europe is THE locomotive driving global metal prices and investors interest in mining equities. The Chinese are back from holiday too, but so far their traders are only testing the waters in the base metal pool. All in all, enough hopeful news to rally almost everything except the U.S. dollar (which fell against a rising euro)...

Miners Up

The ole Colonel has been charting up some the latest results and the broader markets are now open. It looks like the miners are headed for the Red Bucket Saloon, except for our Canadian friends at Quadra FNX. Here is the latest chart of the Eureka Miner's Index© (EMI) (a larger and more readable plot is included at the bottom of the blog page):

The shape of the EMI may look a little different to you; the Teton peak in January of this year now looks more like a camel's hump. This is because I've had to re-plot the EMI (red line) to capture just how far we've descended from that lofty Rocky mountain (powers-of-two scale for the number heads). On Jan. 4, the EMI was at 816.78; on Oct.4, we were at the 22.88 level of the mineshaft. Friday the EMI closed at 42.20 and Mer-Kozy has brought us up a little further to 49.83. The EMI is still below its 1-month moving average (blue line) of 59.11. If this reverses to the upside and Oct. 4 is indeed the low for the year, our elevator is headed to higher levels.

On an individual stock basis, Barrick Gold is up 2.2%; Newmont, up 1.5%; General Moly, up 2.7% and for some reason Quadra FNX is down 3.4% (the Canadians may know something we don't  about European plans-for-a-plan although Barrick is happy enough with COMEX gold trading at $1,667.0/oz). Importantly, bellwether miner and copper giant Freeport-McMoRan is up a full 5.1% - as Ruby T says, "I'll take any rally and don't give a hoot what's behind it!"

Gold Price Up, Value Down

Presently COMEX gold is up a healthy $31.2/oz on a falling U.S. dollar. To understand what's going on with gold let's look at the latest chart of the Eureka Miner’s Gold Value Index© (GVI) (a larger and more readable plot is included at the bottom of the blog page with the EMI):

We remain at a high gold value relative to copper, oil and silver with a GVI (gold line) closing at 102.18 Friday and headed a little lower this morning at 101.98. This means that although gold prices are down from their dollar-denominated highs, our lustrous friend has retained more value than copper, oil or silver whose prices have descended more rapidly. By contrast, this April when commodity prices were still inflated gold plumbed a low relative value of 67.68. From the April bottom, gold has recovered more than 50% of lost value.

A trend to lower value may be starting if you believe there will be more Mer-Kozy-like rallies in our future. One encouraging sign is that today's number falls just below the 1-month moving average (black line) of 102.35. A little and not a lot lower relative value decline would indicate that commodity prices are reflating to more stable levels.

More detail on both the EMI and GVI is given below in the Daily Market Report...


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 49.83, up from Friday's 42.20 and below the 1-month moving average of 59.11. The new record low for 2010-2011 was set Oct. 4, 2011 at 22.88. The 1-month average is currently below the 100-level putting us solidly in bear country for the metals & miners.

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. 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 101.98, down from Friday's 102.35 and equal to its 1-month average of 102.35. The new record high for 2010-2011 is 109.97 set on Oct. 4, 2011. The Value Adjusted Gold Price© (VAGP) is $1,365.9/oz which is $301.1/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 210.3 down from Friday's 219.1. 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'>http://eurekaminer.blogspot.com/2011/02/new-record-for-copper-is-100-oil-next.html">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 $84.51
ICE North Sea Brent crude $107.05
Spread (ICE- NYMEX) = $22.54 (last report, $22.10)

Here are the January contracts* with a narrower spread:

NYMEX light sweet crude $84.70
ICE North Sea Brent crude $103.82
Spread (ICE- NYMEX) = $19.12 (last report, $19.44)

* 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 $80+ NYMEX in January 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 $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 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 $1.53 in early trading at $84.51 (November contract, most active); Gold is up $31.2 to $1667.0 (December contract, most active); Silver is up $1.117 to $32.110 (December contract, most active); Copper is up $0.0550 at $3.3285 (December contract, most active)

Western Molybdenum Oxide (General Moly website) is $14.00; European Molybdenum Oxide (Bloomberg) is $13.70; LME cash seller is $14.06, LME moly 3-month seller's contract is $14.06

Stock Market Morning Update

The DOW is up 228.04 points to 11,331.16; the S&P 500 is up 27.60 points at 1183.06

Miners are happy except for Quadra FNX:

Barrick (ABX) $47.65 up 2.17%
Newmont (NEM) $64.00 up 1.46%
US Gold (UXG) $3.94 up 3.96%
General Moly (Eureka Moly, LLC) (GMO) $2.68 up 2.68%
Thompson Creek (TC) $6.94 up 4.20%
Freeport-McMoRan (FCX) $35.74 up 5.09% (a bellwether mining stock spanning copper, gold & molybdenum)
Quadra FNX (TSE:QUX) $9.60 down 3.43%
Timberline Resources (TLR) $0.66 up 4.76%

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

ArcelorMittal (MT) $18.45 up 6.10% - global steel producer
POSCO (PKX) $81.20 up 3.45% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is up 2.72% at $1,331,179.59 (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 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