"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.

Monday, April 5, 2010

$19 Silver for April? The Colonel's Metal & Oil Roundup

Morning Miners!

It is 6:03 AM. Grab a cup of joe and let's see what the Easter bunny left in our basket for April. I have a feeling that gold could get back its giddy-up go after several lack luster months. There is a flood of new articles on the yeller stuff and that's a bullish sign, pardner. Here's a Mineweb sample from South Africa, China and U.K. for the past several days:

The current consolidation in gold offers a buying opportunity (Mineweb, Johannesburg, 4/5/2010)

China's central bank raises spectre of world wide asset bubbles and inflation
(Mineweb, Beijing - REUTERS, 4/2/2010)

Gold to the masses - China's top bank partners with World Gold Council (Mineweb, London, Lawrence Williams , 4/1/2010)

There are several common themes in these headlines: down-the-road inflation remains a concern given the monetary and fiscal policies of developed nations, big players like China and India have set a "sovereign" floor to gold prices, the U.S. dollar rally has its limits given our deficit/debt predicament.

I chose a nominal of $1120/oz for February and March and the markets closed pretty near that price for both months. The ole Colonel believes gold should return to (or exceed) its 1-yr tend line for April which sits right around $1150/oz.

Here are my updated commodity models for the month of April for silver, copper and oil assuming a nominal price for gold of $1150/oz:

The fair value of silver is $18.295 in a range of $17.146 to $19.444

The fair value of copper is $3.5287 in a range of $3.2980 to $3.7594

The fair value of oil is $83.239 in a range of $78.674 to $87.884

COMEX gold this morning is trading at $1129.5

COMEX silver is $17.995, a level undervalued with respect to a $1150/oz gold nominal. Interestingly silver has regained her "beta" in a big way lately so an uptrend in gold should result in a larger bounce for silver.

Here's a simple way to think of a metal's "beta" with respect to a reference metal such as gold. If beta = 1.0, a 1% move in gold should produce (on average) a 1% move in silver. For beta = 2.0, a 1% move in gold gives a 2% change in silver. Got it, pardner? If beta is greater than 1.0, we say silver is "high beta" and ready trot; if less than 1.0, silver is "low-beta" and headed back to the barn.

On February 17th silver's beta with respect to gold (see note 1) was a dismal 0.46. Silver beta peaked at 1.72 on 3/19 but is still a healthy 1.53. Last November we asked the question, Why is Silver So Cheap?. At that time silver was around $17.50/oz with a beta of 1.55, not greatly different from today's numbers. Silver then bounced to break $19 in early December but then the Dubai debt crisis cratered precious metals. This time we could get to $19 fairly easily without breaking my upper range of $19.44/oz. This, of course, assumes gold is headed higher absent any new bugaboos on sovereign debt or...?

Copper broke the key $3.50 level recently and could be headed for my $3.76 upper range trading at $3.6140 this morning. A continued reduction in the London Metal Exchange (LME) inventories together with improving opinions on global growth is a positive sign for copper price. The present beta for copper is a healthy 2.02.

Oil continues to have less resistance to going up than down lately. At $85.72 this morning, oil already sits comfortably above "fair value" for $1150/oz gold. The present oil beta is also looking good at 1.52 (well, good for oil speculators - not so hot for miners and working folks). $90 oil may or may not be in the cards for April but don't be surprised to see a return to this scary level in the coming months.

Molybdenum prices have stabilized in a tight range which is a positive sign for both the metal and the new London Metal Exchange futures market. Here is a wrap up of the latest moly price action:

Western Moly Oxide (FeMo65) $17.11/lb (the price reported by Infomine and tracked by Base Metals on the General Moly Website)

Moly Oxide, Europe (Mo Drummed Molydbic Oxide EU) $17.50/lb (the price reported in the Metals Bulletin)

LME Futures Contracts

3-Month (Buyer) $38,000/metric ton $17.24/lb
3-Month (Seller)$40,000/metric ton $18.14/lb
15-Month (Buyer) $38,000/metric ton $17.24/lb
15-Month (Seller)$40,000/metric ton $18.14/lb

Here is the price action of the LME 3-month contract (seller) from the February launch:

Enough talk, let's walk the walk:

4-WD is OFF - the VIX or "fear index" is below 25, smoother broader markets are still in the cards; metals & miners are good with FCX comfortably above $74; the benchmark 10-year T-Note remains below 4% (what's this?)

The YELLOW light is switched back on our fuel gauge with oil above $80

An ORANGE light is ON for possible adverse regulation/legislation: Miner's claim fee, Miner taxation, Cortez Hills & mercury emissions

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

NYMEX/COMEX: Oil is up $0.85 in early trading to $85.72 (May contract, most active); Gold is up $3.4 to $1129.5 (June contract, most active); Silver is up $0.105 to $17.995 (May contract); Copper is up $0.0300 to $3.6140 (May contract); Western Molybdenum Oxide remains at $17.11

The DOW is up 48.97 points to 10976.04; the S&P 500 is up 8.61 to 1186.71. The miners are happy campers:

Barrick (ABX) $39.63 up 0.45%
Newmont (NEM) $53.75 up 1.59%
US Gold UXG) $2.92 up 3.18%
General Moly (Eureka Moly, LLC) (GMO) $3.44 up 1.78%
Thompson Creek (TC) $14.62 up 3.18%
Freeport-McMoRan (FCX) $87.56 up 1.49% (a bellwether mining stock spanning copper, gols & molybdenum)

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

ArcelorMittal (MT) $46.25 up 1.74% - global steel producer
POSCO (PKX) $124.73 up 4.14% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is is up 1.88% to $1,415,462.83 (what's this?).


Colonel Possum

Write Colonel Possum at colonelpossum@gmail.com for answers to your questions or to request e-mail updates on the market

Note 1: The Colonel's "metal-versus-gold" beta is calculated from the most recent 3-month slice of COMEX futures data (most active contract) and normalized to the 200-day moving price average for both the metal and gold.

Headline photograph by Mariana Titus

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