Gold Soars, Copper Falls, Moly Next? - Ask the EMI

SPECIAL NOTE (1): On 7/1/2010 the Eureka Miner's Index (EMI) described below was modified by a gold/silver ratio (Au:Ag) to further gauge fear in the marketplace. Click here for details
SPECIAL NOTE (2): On 8/9/2010 the Eureka Miner's Index (EMI) described below was modified with a low interest rate cap (LIRC) on the 10-year Treasury Note to address deflation influences on the index. Click here for Details

Morning Miners!

It is 5:30 AM. The Diamond Valley has rosy checks and a sliver moon smile rising in the east. Let's pour a cup and get to work. Yesterday was a rough-tough for the markets with the DOW falling below its so-called "flash crash" of 9869.62 to close at a 7-month low of 9816.49. This report follows the S&P 500 for a sense of where the broader markets are going because it includes 500 companies instead of just 30 for the DOW. Nonetheless, the S&P closing at 1050.47 is a healthy 13.8% below the lofty days of April (S&P intraday high of 1219.8, 4/26/10). Yesterday gold soared (COMEX Au $1240.8/oz) , copper fell into deep bear country (COMEX Cu $2.7660/lb) and molybdenum continued to show resilience although Euro moly oxide is trading a dollar below her western cousin ($15/lb versus $16/lb). Where to next?

Last August this Report created the Eureka Outlook Dashboard to give the reader a quick look at where the metals & miners important to our county are headed. Lately we have been turning on more and more warning lights to yellow and orange. I thought it might be helpful to come up with a single number to judge just how bad (or good) things really are.

You may point out that we already have a single number - the value of the Eureka Miner's Grubstake Portfolio. Yesterday it fell into the red for the year closing at $1,262,660.69 down 0.9% from last year's $1,274,064.67. If the composite performance of these twelve stocks that directly or indirectly affect Eureka County is a barometer, we're headed for a low pressure storm, pardner. The portfolio does, however, reflect cumulative performance - I'm looking for a thermometer that tells me something about the current temperature of the markets that influence our local mining economy.

Here's the Colonel's latest idea. How about an index (single number) built from key things we monitor on a daily basis: marketplace fear, interest rates, metal prices, oil price and the performance of benchmark miners? Let's call it the Eureka Miner's Index (EMI) which will roll up all these factors into one market temperature for Eureka County. If it has a value greater than 100 we'll say we're on solid footing; less than 100, look out below!

Here are the pieces of the EMI:

COMEX copper price
NYMEX oil price
Market volatility (VIX or "fear index")
Interest rate (benchmark 10-year Treasury Note)
Bellwether miner Freeport-McMoran (FCX)
Benchmark gold miner Barrick (ABX)
Benchmark moly producer Thompson Creek (TC)

"Hold your horses Colonel! This makes as much sense as a left-handed hammer; where's the price of gold and moly? Where's General Moly (GMO)? Where's US Gold (UXG)? Ely mines copper not Eureka! At least you included Barrick...what's up?"

OK, good questions - let me explain my choices. Let's start with miners. If we are looking for market direction, senior miners with a proven track record under market duress (FCX & ABX large cap seniors & TC small cap senior) are a better indicator than junior miners in pre-production, development or start-up phases (GMO & UXG). For example Freeport and Thompson Creek showed signs of weakness in early April while markets and metal prices climbed to the clouds. Copper prices hit a top on 4/12 (COMEX Cu $3.691/lb intraday) and the S&P 500 topped out on 4/26. FCX and TC trended down while GMO and UXG headed higher. Who saw the May commodity massacre coming...GMO & UXG or big'uns FCX & TC? Get my point.

"What about the price of gold?" Gold as we have seen in the past six months wears many hats: fellow traveler with commodities during rallies, safe haven during crisis, alternative to fiat currencies to hedge inflation fears. To build a mining index, I'd rather track Barrick whose share price rolls up gold price together with all the realities of mining (fuel and labor cost, government regulation etc.). The same argument applies for molybdenum - Thompson Creek reflects moly price as Barrick reflects gold but in the context of mining not spot and futures markets.

"OK but why then are we concerned about the cost of copper in Eureka?" Copper has been our brave canary in the global mineshaft since the beginning of this Report and has foreshadowed market declines with great clairvoyance. Remember copper hit its low in December 2008 long before the S&P 500 bottom in March 2009. As copper goes; so go the metals, so go the miners, so go the markets in my world. Oil is similar to copper because it is so key to the global growth story. This proves to be a two-edged sword because the price of oil is an input cost to miners but tumbling oil prices may presage a global slowdown.

If you buy my story, this is how we put it all together:

EMI = NORM x [(COMEX Cu)(FCX)(ABX)(TC)]/[(NYMEX Oil)(VIX)(10-yr T-Note)]

"Holy Cow, that's a whopper Colonel!"

Let me explain. "NORM" is not your neighbor but a normalization factor that brings the EMI to 100 points when we sit at the threshold of good or bad times (see note 1). All the other pieces are commodity or miner share prices together with fear and interest rates...what a doozie! If market fear, oil prices or interest rates go up; the EMI goes down. If the price of copper or the share price of FCX, ABX & TC go up; the EMI goes up. Hey that's not too hard to understand!

Here's what the EMI tells us lately:

4/12/10 EMI = 239.5 (COMEX copper high)
4/26/10 EMI = 198.0 (S&P 500 intraday high)
6/4/10 EMI = 57.9 (last Friday close)
6/7/10 EMI = 50.67 (yesterday's nose dive)

Remember: greater than 100 - yee-ha!...Less than 100 - yikes!

This Report will calculate a weekly EMI with our Monday morning molybdenum roundup. Stay tuned buckaroos.

Looks like we finally got that relief rally for miners today.

Enough talk, let's walk the walk:

4-WD is ON - rough roads in the marketplace; The VIX or "fear index" moves to the high-30s, way above our 25 level threshold; metals & miners remain on shaky timber with benchmark FCX falling to low $60s well below its 200-day average of $76 (our new warning level), 10-year Treasurys are safely below 4% preserving a low-interest rate environment

The YELLOW light is turned on for Commodity Reflation with copper trading below $3/lb

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

The ORANGE light remains on for Investor Confidence the possibility of a 20% correction in the broader markets

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 $0.24 in early trading to $71.68 (July contract, most active); Gold is up $4.0 to $1244.8 (August contract, most active); Silver is up $0.153 to $18.315 (July contract); Copper is down $0.0100 to $2.7560 (July contract)

Western Molybdenum Oxide is at $16.00; LME moly 3-month seller's contract down to $15.20, LME cash seller down to $14.97

The DOW is down 40.28 points to 9,776.21; the S&P 500 is down 6.62 to 1043.85. The miners are happy except for TC:

Barrick (ABX) $44.49 up 3.18%
Newmont (NEM) $57.06 up 3.34%
US Gold (UXG) $4.08 up 4.35%
General Moly (Eureka Moly, LLC) (GMO) $3.24 up 2.21%
Thompson Creek (TC) $8.15 down 2.40%
Freeport-McMoRan (FCX) $60.07 up 2.40% (a bellwether mining stock spanning copper, gols & molybdenum)

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

ArcelorMittal (MT) $26.60 down 0.15% - global steel producer
POSCO (PKX) $90.53 up 1.07% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is is up 1.74% to $1,284,619.82 (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: Here are the pieces to the normalization factor NORM:

Key levels/prices

VIX = 25
10-year Treasury Note = 4%
COMEX copper = $3/lb
NYMEX Oil = $80/bbl

and 200-day averages for benchmark miners:

FCX = $76
ABX = $39.6
TC = $12.4

then...

NORM = 100/([(COMEX Cu)(FCX)(ABX)(TC)]/[(NYMEX Oil)(VIX)(10-yr T-Note)])

Headline and series photographs by Mariana Titus