Gold Value Reversal; What's the Buying Power of the Dollar?

Blinded by the Light - Devil's Gate, Eureka, Nevada

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 Kitco commentary: Copper and Gold Plan Their 2012 World Tour (01/30/2012)

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

This morning's...
COMEX Gold price = $1,747.1/oz (February contract most active)
Eureka Miner’s Gold Value Index© (GVI) = 94.07 (gold value trend reversal to the upside)
Value Adjusted Gold Price© (VAGP) = $1,551.8/oz
COMEX - VAGP = $195.3/oz; gold is trading at a premium to key commodities; the gold-to-copper ratio continues to exceed recession levels


Wōdnesdæg
Morning Miners!

It is 6:14 AM. Have a cup of Old Miner Woden's Hump Day Grump... or some of yesterday's Blue Skies, it's still pretty good. Our market bear has been in my ear all morning about the the up and coming "February Flop." Nuts to that, but there is something weird going on with gold...

Gold Value Reversal

Monday, the Report said a reversal in gold value to the upside may be in the works. This morning, I'm willing to say that this is true although it may be temporary. Presently, gold is gaining relative value against key commodities copper, oil and silver - typically a bearish indication for the mining sector. If you own gold, you can be happy that an ounce now buys more pounds of copper, barrels of oil and ounces of silver than it did just a week ago.

A reversal is significant because gold value as measured by the Eureka Miner’s Gold Value Index© (GVI) has been trending down since mid-October. A return to high value levels (GVI > 100) would indeed be a scary sign. October 4 was arguably the worst day for miners when the GVI peaked out at 109.97. Today at 94.07 we are safely below those levels but also 3.6% above where we were just 10-market days ago at 90.81.

It's too early to fully understand why this is happening but some safe-haven buying may be returning from euro-worriers. They have generally preferred the U.S. dollar over gold for some time but that could be changing. Here's what Kitco News reported this morning about Europe and gold:

Market Nuggets: Commerzbank: European Debt Crisis Remains Supportive Influence For Gold (Kitco news, 2/01/2012)

Stay tuned.

What's the Buying Power of the Dollar?

A good friend of this report asked the Colonel if there was an easy way to figure out inflation over different time periods. The answer is yes, very easy!

Checkout the US Inflation Calculator that measures the buying power of the dollar over time:

http://www.usinflationcalculator.com/

You just enter the years and it gives you the inflation rate. Entering 2007 to 2011 gives you 8.5% which says if you bought something for $20.00 in 2007 it would cost $21.70 today.

Perhaps more fun is to remember what you paid for something a long time ago and see what it would cost today. In 1967, I bought a new Chevrolet pickup truck for $2,200; there were cheaper models but the ole Colonel got the 4-speed with a granny low and the venerable 292 stump-puller six-cylinder. No power steering or brakes but it did have a transistor radio.

Plug that price and year into the US Inflation Calculator and it informs you the same truck should cost $14,816.34 or an annual rate of inflation change of 573.5%. Actually that price tag seemed pretty low so I checked the Kelley Blue Book for a 2012 Chevrolet Silverado 1500 priced for Central Nevada to discover a stripped down model now costs $22,185.

The devil is always in the details; here are two little devils:

1) This number is based on the consumer price index (CPI) which is "a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services." How accurately this applies to folks living in Eureka is probably a topic for endless Owl Club debate.

2) The calculator uses an average over an entire year and the January 2012 data doesn't become available until 2/17/2012.

Argue all you want but this is what the government thinks inflation is and it does tell a story about the poor ole greenback.

I did a calculation from raw CPI data that is December 2007-to-December 2011 for the first example and the number is 7.4%, slightly less than the average. I like this one because the Great Recession began December 2007 and it takes you right up to last month. If you put in 2008 to 2011 in the calculator you get only 4.5% which reflects some of the deflation caused during the recession.

Lot's of fun, pardner. By the way, I still drive that 1967 Chevy after 45 years. I think the Colonel got his money's worth inflation or not.

Daily Market Roundup

Mining Report

This morning's mining stocks...

Barrick (ABX) $49.39 up 0.26%
Newmont (NEM) $61.00 down 0.78%
McEwen Mining (MUX) 5.87 up 1.21% (formerly US Gold, UXG)
General Moly (Eureka Moly, LLC) (GMO) $3.77 up 1.34%
Thompson Creek (TC) $8.66 up 2.73%
Freeport-McMoRan (FCX) $46.79 up 1.26% (a bellwether mining stock spanning copper, gold & molybdenum)
Quadra FNX (TSE:QUX) $15.08 down 0.07%
Timberline Resources (TLR) $0.54 up 1.89%

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

ArcelorMittal (MT) $20.98 up 2.24% - global steel producer
POSCO (PKX) $92.16 up 0.44% - South Korean integrated steel producer

The Eureka Miner's Index© (EMI) is above-par at 198.26, up from last report's 191.49 and above the 1-month moving average of 137.57. 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 $6.7/oz at $1,747.1/oz (April contract, most active)

COMEX silver is up $0.538/oz at $33.800/oz (March contract, most active)

The gold-to-silver ratio (Au:Ag) is 51.689 oz/oz

Silver 1-month CRS© is 3.21% (bullish level); weak convergence (Ag neutral)

The Eureka Miner’s Gold Value Index© (GVI) is below-par at 94.07, up from last report's 92.64 and above its 1-month average of 92.21. The record high for 2010-2012 is 109.97 set on Oct. 4, 2011.

The Value Adjusted Gold Price© (VAGP) is $1,551.8/oz which is $195.0/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 $0.0175/lb at $3.8075/lb (March contract, most active)

The gold-to-copper ratio is 458.86 lb/oz; ratios in excess of 400 lb/oz are considered "recession levels" (Cu bearish)

Copper 1-month CRS© is 2.57% (bullish level); weakly divergent (Cu neutral)

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

Metals Week Average:
US$14.00
As of January 30, 2012
(updated weekly)

Ryan's Notes Average:
US$14.075
As of January 31, 2012
(updated twice weekly)

European Molybdenum Oxide (Bloomberg average price, updated Wednesday & Friday):
US$14.10/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 $99.05
ICE North Sea Brent crude $112.31
Spread (ICE- NYMEX) = $13.26 (last report, $11.58)

Here are the May contracts* with a narrower spread:

NYMEX light sweet crude $99.86
ICE North Sea Brent crude $111.68
Spread (ICE- NYMEX) = $11.82 (last report, $10.71)

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

NYMEX WTI 1-month CRS© is 3.90% (neutral level); weak convergence (Oil neutral)

Prices are off their crisis highs and we have $110+ Brent and $95+ 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 80.1 down from last report's 83.1. 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 129.04 points to 12,761.95; the S&P 500 is up 13.04 points at 1325.45

The Eureka Miner's Grubstake Portfolio is up 0.88% at $1,607,836.29 (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