"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, February 2, 2010

Courageous Tiger, The Colonel's Outlook for February

Morning Miners!

It is 6:05 AM. Grab a cup and let's take a peek at what's coming at us in February.The 14th will bring in the Chinese New Year, the Year of the Tiger. The Chinese Lunar New Year occurs every year on the New Moon of the first lunar month, which is the second New Moon after the Winter Solstice. Mardi Gras follows close behind falling on the 16th of February this year. Sounds like a party month to me, maybe its time to cheer up about the markets.

Let's start with an unscientific, astrologically-based prediction. The so-called Great Recession had its worst year in 2008; the Year of the Rat, how fitting. As we enter the Year of the Tiger do you honestly think the Chinese Government intends to be a global party pooper? This is important because the fate of metals and miners this year has a lot to do with continuing Chinese demand. There has been much nervousness about their monetary tightening policy which has put massive pressure on these sectors for the last few weeks. Let's checkout the attributes of the Tiger:

The Tiger is the third sign of the Chinese Zodiac. It is a courageous, authoritative, charismatic, initiating, competitive, dynamic, adventurous, and dramatic sign. Ruling over the first month of spring, other themes associated with the Tiger are renewal, initiative, changefulness, and new beginnings.

Hmmm...sounds like miners are going to be riding with the Tiger to me!

OK Colonel, enough astrology let's do some real science. In January, I tempered earlier enthusiasm for 2010 (Copper Shines a Ray of Hope) with the curious behavior of oil and gold:

"Another worrisome sign is a technical 'inversion' of gold and oil prices which (on a 3-month basis) began January 6th. An inversion means that oil prices move (on average) in the opposite direction to gold even though there can be days where both move up or down together. There were two inversions last year, 2/12 to 3/20 and 4/14 to 5/26. The first was quite possibly a precursor to the frightening stock market bottom in March (S&P 500 intraday low of 666.79 on 3/9/2009). Let's hope the current inversion does not repeat history." (The Eureka Miner's Market Report, 1/22/2010)

Here's the good news. The inversion turned out to be shallow and ended January 28th. There was a broader market downturn and metals and miners were taken to the woodshed. Hopefully this is past us as gold, copper and our favorite miners enjoy a second day of recovery. Freeport McMoRan (FCX), a bellwether miner for investors, was nearly laid to rest last Friday. In early morning trading FCX has come up 9% from its lows last week and awarded by a "Buy" recommendation from Citigroup today. General Moly (GMO) has seen a similar bounce and sits above the key 200-day average at $2.54 this morning. Rock on Tiger!

I just updated my commodity models for the month of February and this is where we are for silver, copper and oil assuming $1,120/oz gold:

The fair value of silver is $17.662 in a range of $16.959 to $18.366

The fair value of copper is $3.1856 in a range of $2.8853 to $3.4860

The fair value of oil is $77.263 in a range of $71.101 to $83.424

Given this morning's prices it appears that silver has has fallen behind gold again lying below its expected range at $16.790. This is similar to the case in November when we asked the question, Why is Silver So Cheap?. If you think gold is headed higher, this may be a good entry point for silver.

Copper is slightly undervalued with respect to gold at $3.1025 but has recovered from its death spiral last week. Concerns about rising London Metal Exchange (LME) inventories and China jitters have been moderated by a rush of new fund money as reported by Reuters this morning:

METALS-Copper gains on funds, China concerns persist (Reuters, 2/2/2010)

Oil will be important to watch in the coming months. As it slowly re-correlates with gold it appears there is less resistance for going up than down. At $75.21 this morning it still has a ways to go to reach "fair value" with the yeller stuff. I'm going to stick my neck out with my first prediction for the new year:

Oil will see $80 before $70 by April Fools Day

Hopefully the ole Colonel won't be an April fool!

Molybdenum at $15 presently sits very near its 3-month and 1-year trend-line. The wild card will be Miss Moly's introduction on the LME next week. If the present commodity recovery has any steam, I believe moly price could see a nice bounce given the broader base of market participants (which includes speculators).

Finally, what happens to gold? There is a sense by some that the dollar rally needs some rest which is supportive of gold price in February. I've picked $1,120 as a nominal price for this month and would be surprised to see any dramatic moves as gold comes back to its 1-year trend-line. Interestingly, the 3-year and 5-year trend-lines are also close to its present value ($1,050 and $1,100 respectively). This is inline with VM Metals forecast for 2010 that we discussed yesterday: $1,050/oz to $1,150/oz

Stay tuned Buckaroos!

Enough talk, let's walk the walk:

4-WD is OFF - the VIX or "fear index" has dropped below 25 for several days, smoother roads ahead (what's this?)

Green light is ON for a return of investor confidence in the metal and mining sectors

Yellow light is ON for possible adverse regulation/legislation: Cortez Hills & mercury emissions

Otherwise, all lights are green on the Eureka Outlook Dashboard (upper right, what's this?)

Oil is up $0.78 in early trading to $75.21 (March contract, most active); Gold is up $10.5 to $1115.5 (April contract, most active); Silver is up $0.110 to $16.790 (March contract); Copper is up $0.0190 to $3.1025 (March contract); Molybdenum is steady at $15.00

The DOW is up 69.98 points to 10255.51; the S&P 500 is up 8.59 points to 1097.78. The miners are mostly up:

Barrick (ABX) $36.66 up 0.44%
Newmont (NEM) $45.60 up 0.14%
US Gold UXG) $2.38 down 1.22%.
General Moly (Eureka Moly, LLC) (GMO) $2.54 up 4.96%
Thompson Creek (TC) $12.49 down 0.24%
Freeport McMoRan (FCX) $72.03 up 0.61% (a bellwether mining stock spanning gold, copper & molybdenum)

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

ArcelorMittal (MT) $41.38 up 1.66% - global steel producer
POSCO (PKX) $118.55 up 1.19% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is is up 0.88% to $1,237,392.75 (what is this?).


Colonel Possum

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