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

DISCLOSURE

The author/editor of the Eureka Miner owns common shares of local mining stocks, General Moly (GMO), McEwen Ming (MUX) 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.

Thursday, January 26, 2012

Gold 7-Week High; Is Silver Still in the Saddle?

And one more thing about silver...

NEW FORMAT for 2012

Morning Commentary
Daily Market Roundup
- Gold & Silver Report
- Copper & Molybdenum Report
- Oil Watch
- Debt Crisis Watch
- Stock Market Morning Update
- Eureka Miner's Million Dollar Grubstake Portfolio


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 = $1,724.7/oz (February contract most active)
Eureka Miner’s Gold Value Index© (GVI) = 91.51 (declining gold value trend)
Value Adjusted Gold Price© (VAGP) = $1,574.8/oz
COMEX - VAGP = $149.0/oz; gold is trading at a premium to key commodities; the gold-to-copper ratio continues to exceed recession levels



Þūnresdæg
Morning Miners!

It is 6:46 AM. Have a Thursday cup of Uncle Ben's Morning After. Nothing like a Central Bank to boost the fortunes of gold - they either buy the stuff to hedge paper money or set monetary policy to enhance its lustrous allure. Our Federal Reserve did the latter in a big way yesterday and precious metals have been rallying ever since.

This morning at 8:55 AM EST COMEX gold touched $1,730.5/oz before falling back to $1,724.7/oz; COMEX silver reached $33.72/oz at the same time and is presently trading at $33.540/oz.

Gold 7-Week High

On Wednesday, Federal Reserve Chairman Ben Bernanke said he expects short-term interest rates to stay close to zero “at least through late 2014.” As part of their new communication strategy, Fed officials projected that rates could stay at a record low for three more years as unemployment comes down slowly and inflation moderates.

Why is this good for gold and silver? A very low interest rate environment is bullish for both since competing assets, such as bonds, will continue to have low annual returns. Precious metals are a store of value and create no income; when interest rates rise, money flows typically reverse and the price of gold and silver decline. The Fed's actions also signal that they are still very concerned about the prospects for domestic and world economies which supports the safe-haven aspect of precious metals.

Kitco News reports this morning that yesterdays' announcement may extend the secular bull market for gold by several more years:

Sharps Pixley: FOMC Statement Means Gold Bull Run Has At Least Three More Years To Go (Allen Sykora, Kitco Marget Nuggets, 1/25/2012)

Our favorite Norseman Thor hears the thunder of hoofbeats in the distance.

Is Silver Still in the Saddle?

In late December, the Eureka Miner looked at gold's trusty side-kick:

A good friend of this report asked me if I thought silver was still a good investment. If you are willing to sit through a lot of wild price swings, my answer is simply, "Yes!" Silver, like its companion gold, has good long term precious metal fundamentals. Silver also has a bright future as new uses in hi-tech applications will only increase its industrial demand - high-density batteries come to mind in our evermore electrified world. (12/27/2012)

At that time COMEX gold was trading at $1,598.8/oz and silver at $29.060/oz. Given this mornings pop, silver has gained 15.4% to gold's 7.8%. So far so good.

Silver is known as a "high-beta" metal because its price sensitivity relative to gold is usually greater than 1.0. Presently the 3-month beta is 1.64 so a 1% change in gold price is expected to bring a 1.6% change in silver price. Beta is a two-way street so declines in gold price often can be followed by much more dramatic declines for the white metal - not the problem this morning.

The closely watched gold-to-silver ratio has also fallen to bullish levels for silver. Near historical norms, today's ratio of 51.4 oz/oz is still showing good stability (about 3% variation over the last 1-month of COMEX data). There is a growing consensus that gold could make new highs in 2012 challenging or surpassing the $2,000/oz-level. Given the current ratio, a silver price of $39/oz is very comfortable with $2,000/oz gold.

So is silver still in the saddle? You bet. With a 3-month gold-silver correlation of 0.96 wherever gold goes silver will surely follow; and with the present beta, at a quicker pace.

Please do your own homework on this one - the ole Colonel has fallen down a few mineshafts with these two rascals in the past. I'm betting we're in the up-elevator now, stay tuned.

Daily Market Roundup


Mining Report

This morning's mining stocks...

Barrick (ABX) $49.36 up 1.96%
Newmont (NEM) $61.13 up 1.46%
US Gold (UXG) $5.98 up 1.87%
General Moly (Eureka Moly, LLC) (GMO) $3.47 down 1.76%
Thompson Creek (TC) $8.74 up 2.22%
Freeport-McMoRan (FCX) $48.39 up 5.01% (a bellwether mining stock spanning copper, gold & molybdenum)
Quadra FNX (TSE:QUX) $14.90 up 0.07%
Timberline Resources (TLR) $0.53 up 6.00%

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

ArcelorMittal (MT) $22.13 up 3.56% - global steel producer
POSCO (PKX) $93.39 down 0.20% - South Korean integrated steel producer

The Eureka Miner's Index© (EMI) is above-par at 214.84, up from last report's 154.57 and above the 1-month moving average of 117.25. The new record low for 2010-2012 was set Oct. 4, 2011 at 22.88. The 1-month average is currently above the key 100-level.

The EMI gives us the market temperature for the factors that have the greatest impact on mining in Eureka County. The record 2010-2012 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 $24.6/oz at $1,724.7/oz (February contract, most active)

COMEX silver is up $0.419/oz at $33.540/oz (March contract, most active)

The gold-to-silver ratio (Au:Ag) is 51.422 oz/oz

Silver 1-month CRS© is 3.09% (bullish level); weak divergence (Ag neutral)

The Eureka Miner’s Gold Value Index© (GVI) is below-par at 91.51, up from last report's 90.92 and below its 1-month average of 92.09. The record high for 2010-2012 is 109.97 set on Oct. 4, 2011.

The Value Adjusted Gold Price© (VAGP) is $1,574.8/oz which is $149.0/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 up $0.0610/lb at $3.8905/lb (March contract, most active)

The gold-to-copper ratio is 443.31 lb/oz; ratios in excess of 400 lb/oz are considered "recession levels" (Cu bearish)

Copper 1-month CRS© is 2.66% (bullish level); divergent (Cu bearish)

The latest molybdenum oxide spot and futures prices (courtesy of Thompson Creek Metals):

Metals Week Average:
US$13.875
As of January 23, 2012
(updated weekly)

Ryan's Notes Average:
US$13.80
As of January 24, 2012
(updated twice weekly)

European Molybdenum Oxide (Bloomberg average price, updated Wednesday & Friday):
US$13.98/lb

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

US$14.29/lb (US$31,500/metric ton)

Daily Oil Watch

Latest Nevada Fuel Prices (click this link)

On February 1st, 2011, we identified North Sea Brent crude oil as a good barometer for the crises in the Middle East and North Africa (MENA). The next conflict could be in the Persian Gulf. Brent remains above $100/bbl maintaining a spread above 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 $101.10
ICE North Sea Brent crude $111.64
Spread (ICE- NYMEX) = $10.54 (last report, $11.40)

Here are the May contracts* with a narrower spread:

NYMEX light sweet crude $101.76
ICE North Sea Brent crude $111.34
Spread (ICE- NYMEX) = $9.58 (last report, $10.62)

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

NYMEX WTI 1-month CRS© is 3.11% (bullish level); weak divergence (Oil neutral)

Prices are off their crisis highs and we have $110+ Brent and $100+ NYMEX in May favoring high oil prices this 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 79.4 down from last report's 89.2. A level above 200 is time for serious concern. We are now well 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 and continuing into 2012.

Stock Market Morning Update

The DOW is up 58.57 points to 12,815.53; the S&P 500 is up 4.60 points at 1330.65

The Eureka Miner's Grubstake Portfolio is up 1.89% at $1,605,493.98 (what's this?).

Cheers,

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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