"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, McEwen Mining (MUX) and General Moly (GMO). 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
1
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?).

Cheers,

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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