"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.

Monday, May 24, 2010

It's All About Oil, Gold, Copper...and Libor?


Morning Miners!

It is 5:30 AM and the Diamond Valley holds a dusty rose. I said that last spring about this time and she is no less pretty today, grab a cup and let's get to work. We have been through some tough times over the last several weeks with the metals & miners and the whole commodity space has suffered on deteriorating financial news from Europe. We'll scratch our heads on oil, gold and copper in a moment but first let's look at another key indicator of where the markets may be headed.

After living through 2008 you may not have a lot of trust in big banks but what happens when banks don't trust each other? One indication is the interest rate they charge for short term loans amongst themselves: the three-month U.S. dollar London interbank offered rate — or Libor. You may have run into Libor if you got a bank loan since it is often a benchmark for setting retail lending rates. It has been creeping up steadily through the European debt crisis and has hit a new high of 0.51% this morning as attention turns from Greece to Spain. The health of European banks was shaken over the weekend on news that the Bank of Spain had decided to take control of CajaSur, a regional savings bank. The Wall Street Journal reports a summation by Giles Watts, head of equities at City Index:

“The nationalization over the weekend of Spanish bank CajaSur serves as a stark warning to the markets and there is the fear that further bailouts could become a theme should governments not get a grip on sovereign debt quickly...” (WSJ, 5/24/2010)

Libor has been a lot higher during our own financial woes (single digits) but its recent rise is not a good omen. Something new to track, pardner. Now let's look at more familiar indicators.

This report tracks the movement of oil and copper relative to gold. Asking the question, "how many barrels of oil or pounds of copper can I buy for an ounce of gold?" is a good way to monitor the value of oil and copper in terms other than currency. One troubling sign is that oil/gold and copper/gold are presently negatively correlated. That's a fancy way of saying that when gold goes up (on average) oil and copper go down. The 3-month correlation of both went negative around the 12th of this month and we watched copper drop below the key $3/lb level last week as oil struggled to stay above $70/bbl (July NYMEX contract). The same negative correlation happened in January and the metals & miners got hammered. Fortunately, the period of this inverse relation was short and we enjoyed a nice rally until this month. Ironically, a much longer period occurred last May. I thought it might be instructive to compare prices now and then; 5/11/09 was the peak of the negative correlation one year ago:

Oil $57.7 (5/11/09) $70.68 (5/24/10) up 22.4%
Gold $913.0 (5/11/09) $1187.8 (5/24/10) up 30.1%
Copper $2.0745 (5/11/09) $3.1130 (5/24/10) up 50.1%

and our other favorites:

Silver $13.855 (5/11/09) $17.845 (5/24/10) up 28.8%
Moly (W) $9.25 (5/11/09) $17.00 (5/24/10) up 83.8%

To answer our question,"how many barrels of oil or pounds of copper can I buy for an ounce of gold?"

Oil

15.8 bbl (5/11/09) 16.8 bbl (5/24/10) up 6.3%

Copper

440 lbs (5/11/09) 381 lbs (5/24/10) down 13.4%

And the closely watched gold/silver ratio (or "how many ounces of silver can I buy for an ounce of gold?" :

Silver

65.90 oz (5/11/09) 66.56 oz (5/24/10) up 1.0%

Hmm...not too bad when you see how far we've come in a year. With respect to gold, oil is a little cheaper; copper, a bit more expensive. Silver is roughly the same value. When times were good earlier this year silver came in at roughly 63 ounces; historically in non-recessionary times this can fall to 50. A higher number usually denotes fear in the marketplace.

In dollar terms all of our favorite commodities have "reflated" 20% to 80%. There are further positive signs that copper is moving back up and the negative correlation with gold may soon be over. Checkout this article:

Copper Jumps Most in Three Months on Signs of Ample Chinese Use (Bloomberg News, Millie Munshi, 5/21/2010)

Molybdenum price has held up pretty well through all this turbulence although there are some negative signs on the steel front with global hot rolled coil (HRC) and rebar prices declining after a mostly steady rise this year. Here is a headline from this morning's Steel Business Briefing (SBB) on the primary input price to steel production:

"Iron ore reference price fell 9% last week - The Steel Index

Spot iron ore prices dropped sharply last week, according to the latest report from The Steel Index, following on from the 5% fall the previous week." (SBB, 5/24/2010)

Here is how Miss Moly fared last week:

Western Moly Oxide (FeMo65) down $0.25 to $17.00/lb (the price reported by Infomine and tracked by Base Metals on the General Moly Website)

Moly Oxide, Europe (Mo Drummed Molydbic Oxide EU) $16.82/lb (the price reported in the Metals Bulletin)

LME Futures Contracts

3-Month (Buyer) $37,500/metric ton $17.01/lb
3-Month (Seller) $38,500/metric ton $17.46/lb

15-Month (Buyer) $37,500/metric ton $17.01/lb
15-Month (Seller)$38,500/metric ton $17.46/lb

Here is a chart of the LME 3-month contract (seller) from the February launch to the present:



Enough talk, let's walk the walk:

4-WD is ON - rough roads in the marketplace; The VIX or "fear index" is in the 30-40s well above our 25 level threshold; metals & miners remain on shaky timber with benchmark FCX trading in the high 60s well below its 200-day average of $75 (our new warning level), 10-year Treasurys are safely below 4% preserving a low-interest rate environment

The GREEN light has returned for Commodity Reflation with copper trading above $3/lb

The YELLOW light returns for Stable Markets with the VIX above the 30 level (what's this?)

The YELLOW light returns for Investor Confidence with the possibility of a greater than 10% correction in the broader markets possible

The GREEN light remains turned on our Fuel Gauge with oil below $80

A ORANGE light is ON for possible adverse regulation/legislation: Mine Safety Violations, Miner's claim fee, Miner taxation, Cortez Hills, mercury emissions &
General Moly Mt. Hope Water Rights


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

NYMEX/COMEX: Oil is up $0.64 in early trading to $70.68 (July contract, most active); Gold is up $11.7 to $1187.8 (June contract, most active); Silver is up $0.172 to $17.845 (July contract); Copper is downup $0.0520 to $3.1130 (July contract)

Western Molybdenum Oxide is at $17.00, LME moly 3-month seller's contract sits at $17.46

The DOW is down 121.01 points to 10172.38; the S&P 500 is down 0.978 to 1086.72. The miners are mostly happy campers:

Barrick (ABX) $41.50 up 1.17%
Newmont (NEM) $53.24 up 1.72%
US Gold (UXG) $3.60 up 2.86%
General Moly (Eureka Moly, LLC) (GMO) $3.34 down 0.89%
Thompson Creek (TC) $9.47 up 0.32%
Freeport-McMoRan (FCX) $67.10 up 0.13% (a bellwether mining stock spanning copper, gols & molybdenum)

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

ArcelorMittal (MT) $29.54 down 3.50% - global steel producer
POSCO (PKX) $94.20 up 2.03% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is is down 0.41% to $1,286,962.71 (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

Headline photograph by Mariana Titus

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