"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.

Wednesday, December 7, 2011

What is the Value of Gold Relative to Stocks?

Shootout - Bonnie & Clyde View

NEW FORMAT for 2012

The Eureka Miner's Market Report has a new format. Three daily reports, "Mining", "Gold & Silver" and "Copper & Molybdenum" consolidate key morning market information for metals and mining relevant to Eureka County and surrounding areas with new expanded detail on moly prices.

The "Daily Market Roundup" also includes an "Oil Watch" and "Debt Crisis Watch" to monitor the impacts of global events on oil and fuel prices and the unfolding debt crises here and in Europe. Finally, "Stock Market Morning Update" provides the latest on the broader markets as well as the Eureka Miner's Million Dollar Grubstake Portfolio.

Have a good read and welcome back!

My Latest International Business Times commentary: Gold and Silver “Together Again” (12/05/2011)

My latest Kitco commentary:
What does CRS© tell us about Gold, Copper & Oil? (11/28/2011)

This morning's...
COMEX Gold price = $1,739.0/oz (December contract most active)
Eureka Miner’s Gold Value Index© (GVI) = 96.18 (declining gold value trend)
Value Adjusted Gold Price© (VAGP) = $1,510.8/oz
COMEX - VAGP = $228.2/oz; gold is trading at a premium to key commodities; the gold-to-copper ratio continues to exceed recession levels but is trending down (Cu bullish)

Copper 1-monthCRS© is 2.33%; bullish level, converging stability (Cu bullish)

Oil 1-month CRS© is 3.11%; bullish level, stalled divergence (Oil neutral)

Morning Miners!

It is 5:53 AM. If you'd prefer to skip Old Miner Woden's lousy I Told You So coffee, there's some Red Label brewing in the hi-bay. Our market bear couldn't be happier - gold is up and the markets are down on rumors that the European Summit this Friday will be a dud and the euro currency will be back on the railroad tracks. I'd rather wait and see but the old codger crowing about the lustrous metal reminds me to scratch my head on a question I got from Tim Arnold the other day...

Is Gold Undervalued Relative to Stocks?

Tim asked me a terrific question about gold and the stock market the other day and the following is not a complete answer but a start. Tim was puzzling the value of gold relative to the broader markets.

This report spends a lot of time worrying about the relative value of gold with respect to key commodities copper, oil and silver. Presently gold is stabilizing near historical norms with respect to oil and silver but is still trading at a considerable premium with respect to copper. The gold-to-copper ratio today is 488.8 lbs/oz and remains at recession levels (>400 lbs/oz) although it has been trending down. An ounce of gold that buys 350 lbs of copper would be closer to "normal."

What if we apply the same thought to stock markets and look at the ratio of gold to the S&P 500? I like the S&P because it is a broader index than the DOW (500 versus 30 of America's best companies) and it is numerically similar to the price of gold in U.S. dollars. The table below calculates the gold-to-S&P 500 ratio (Au:S&P 500) for some key dates over the last tumultuous 4 years (there is a larger and more readable chart at the bottom of this blog page):

Let's start with the S&P 500 at the peak of market exuberance before the Great Recession. The intraday high was 1,576.09 on Oct. 11, 2007 and COMEX gold traded at a lowly (at least in today's way of thinking) $818.4/oz. Our ratio was then 0.5193.

At the opposite end of exuberance is the market bottom for stocks during the 2008-2009 financial crisis. On March 6, 2009 the S&P plumbed the "Devil's Triple-Six" at 666.79. Our ratio was 1.4517.

Given just two points, the ole Colonel would say that gold was held in higher regard in March 2009 than in the fall of 2007. If we call March 6, 2009 a "high relative value" for gold then the yellow metal traded at a 64.2% discount to the broader market during the height of the bubble in stocks (last column in the table).

Alternately, on the worst day for stocks this year to date, gold traded at a 3.6% premium to stocks on October 4, 2011. If we applied that October ratio (1.5036) to yesterday's closing S&P 500 we can calculate the price of gold in October terms:

gold price = 1,258.47 x 1.5036 = $1,892.2/oz

Yesterday's closing COMEX gold was $1,731.8/oz so we've lost some gold value lately. Relative to March 6, 2009 gold is trading at a 5.2% discount to that "high relative value" mark.

The table includes some other notable high and low watermarks for markets and suggests the May 2, 2011 high was a little "bubbly" with gold trading down at a 21.6% discount (but no where near the 64.2% gap of the 2007-style bubble).

We can flip this argument around and use the March 2009 ratio to tell us where the S&P should be given this morning's gold price of $1,739.0/oz:

S&P 500 = $1,739.0/oz / 1.4517 = 1,197.9

The S&P 500 is currently 1,249.67 so a market bear (like Woden) might say we've got some more downside at least given the price of gold. Today's gold is only about 4% off the "high value" mark of March 2009 so I'd answer the question of today's blog title this way:

Q. What is the value of gold relative to stocks?

A. Presently gold trades at a high relative value to stocks based on the last four years. By contrast, gold had a significantly lower value before the onset of the Great Recession and in May of this year.

Tom gave me some reading assignments which I have not had time to do. Let's call today's discussion some preliminary food for thought - more to come!

Thanks Tim for a good question.

Daily Market Roundup

Mining Report

This morning's mining stocks...checkout Quadra FNX...

Barrick (ABX) $50.94 down 0.51%
Newmont (NEM) $67.62 up 0.70%
US Gold (UXG) $3.89 down 2.02%
General Moly (Eureka Moly, LLC) (GMO) $3.43 down 2.00%
Thompson Creek (TC) $7.26 down 1.49%
Freeport-McMoRan (FCX) $40.42 down 0.30% (a bellwether mining stock spanning copper, gold & molybdenum)
Quadra FNX (TSE:QUX) $15.71 up 0.06%
Timberline Resources (TLR) $0.63 down 1.56%

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

ArcelorMittal (MT) $18.83 down 2.44% - global steel producer
POSCO (PKX) $87.13 up 0.40% - South Korean integrated steel producer

The Eureka Miner's Index© (EMI) is below-par at 84.04, down from last report's 85.23 and above the 1-month moving average of 70.38. 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.

The EMI gives us the market temperature for the factors that have the greatest impact on mining in Eureka County. The record 2010-2011 high for the EMI is 816.78 set 01/04/2011; the low was set 10/4/2011 at 22.88. An EMI of 100 is the boundary between hot and cold markets for the metals & miners.

Gold & Silver Report

This morning's...

COMEX gold is up $7.2/oz at $1,739.0/oz (February contract, most active)

COMEX silver is up $0.026/oz at $32.770/oz (March contract, most active)

The Eureka Miner’s Gold Value Index© (GVI) is below-par at 96.18, up from last report's 95.52 and below its 1-month average of 98.42. The new record high for 2010-2011 is 109.97 set on Oct. 4, 2011.

The Value Adjusted Gold Price© (VAGP) is $1,510.8/oz which is $228.2/oz below the current COMEX gold price.

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 price is less than the VAGP, then gold is undervalued; if above, overvalued.

Copper & Molybdenum Report

This morning's...

COMEX copper is down $0.0180/lb at $3.5575/lb (March contract, most active)

The gold-to-copper ratio (Au:Cu) is 488.83 lb/oz; ratios in excess of 400 lb/oz are considered "recession levels" but the ratio is now trending down (Cu bullish).

The latest molybdenum oxide spot and futures prices:

Metals Week Average:
As of December 5, 2011
(updated weekly)

Ryan's Notes Average:
As of Dec 02, 2011
(updated twice weekly)

European Molybdenum Oxide (Bloomberg average price, updated Wednesday & Friday):

London metal Exchange (LME) molybdenum 3-month seller's contract:

US$13.83/lb (US$30,500/metric ton)

Daily Oil Watch

Latest Nevada Fuel Prices (click this link)

On February 1st we identified North Sea Brent crude oil as a good barometer for the ongoing crises in the Middle East and North Africa (MENA). It remains above $100/bbl with a large spread from the North American benchmark, Western Texas Intermediate or "Texas light sweet crude", traded on the NYMEX.

Here are the key front-month contracts this morning:

NYMEX light sweet crude $100.74
ICE North Sea Brent crude $110.11
Spread (ICE- NYMEX) = $9.07 (last report, $9.37)

Here are the March contracts* with a narrower spread:

NYMEX light sweet crude $100.88
ICE North Sea Brent crude $109.48
Spread (ICE- NYMEX) = $8.17 (last report, $8.60)

* NYMEX futures contracts have rolled forward, we now show January and March for a 2-month look-ahead

Prices are off their crisis highs and we have $100+ Brent and $100+ NYMEX in March favoring high oil prices throughout the winter and into spring.

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 160.1 up from last report's 150.4. A level above 200 is time for serious concern. We are now below that level.

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.

Stock Market Morning Update

The DOW is down 52.15 points to 12,097.98; the S&P 500 is down 8.80 points at 1,249.67

The Eureka Miner's Grubstake Portfolio is down 0.77% at $1,478,322.85 (what's this?).


Colonel Possum

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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