"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.

Thursday, July 8, 2010

The Colonel's Oil & Metal Roundup for July - General Moly Good News

Morning Miners!

It is 6:00 AM sharp. Have a cup of Thor's Double-Thunder java and let's chase the double-dip demons out of the break room once and for all. There have been so many negative economic headlines lately that it's high time to ask the metals what they think. The ole Colonel has avoided metallic prognostication for the past two months given high market volatility and a constant Cassandra chorus of doom from the media talking heads.

Doug Kass, a legendary market bear, called a bottom this week on the broader markets and is buying stocks. Why has this grizzly joined the petting zoo? By his account the markets are way oversold on headline news of gloom and doom. To his credit, Kass nailed the S&P 500 bottom last year at the Devil's Triple-Six (S&P 500 intraday bottom was 666.79 on March 6/09) so I tend to listen when he speaks. Kass wisely reminds us that markets are not economies and repeated the adage that "Wall Street is paved by geniuses that were right once." I don't expect that he will be part of the Manhattan pavement anytime soon.

Yesterday we took a tour of the Colonel's charts (Gold Hits 6-Week Low - What's Going On?) and discovered that oil and copper futures have been in an inverted state when compared to gold over the last three months of data. This means that (on average) oil and copper have trended lower as gold has risen higher. A persistent level of fear in the marketplace has driven investors to gold and put downward pressure on these two important commodities of global growth. The good news is that both inversions have peaked and it appears that oil and copper are re-establishing their normal positive correlation with gold even though gold prices have retreated from their recent highs.

When making predictions on oil and copper prices, this Report typically chooses a nominal price for gold for the month then determines the fair value and range from each of these commodity models. Because the oil/gold and copper/gold models are inverted and in flux, I believe it makes more sense to choose a nominal price for both gold and oil and predict copper price from the latter. Copper and oil have both been traveling down the mineshaft hand-in-hand for May-June as we saw in yesterday's chart (the yellow wiggly line shows current price movement, see note 1):

(A larger, more readable chart can be found at the bottom of this blog page)

I'll stick my neck out and say that NYMEX oil will not plunge into the $60/bbl territory this month as claimed by some bearish commentators but will bounce around $75/bbl on improving global growth news. For a nominal oil price of $75 here is my copper price prediction for July:

The July fair value of copper is $3.0531 in a range of $2.7718 to $3.3341

This morning the COMEX copper September contract (most active) is $3.0455 just below fair value, a positive sign for metals & miners since $3/lb is a key level for this Report.

Picking a nominal for gold is a bit more dicey given the recent downward pressures. Jim Wyckoff, whose analysis this Report greatly admires, gave us his thoughts on gold price yesterday afternoon:

P.M. Kitco Metals Roundup: Comex Gold Ends Higher as Bargain Hunters Step in to Buy Price Weakness (Kitco News, 7/7/2010)

Based on his thoughts and a little horse sense, the ole Colonel is going to fix a nominal price for July's COMEX gold of $1195/oz. Since silver has remained positively correlated with gold through May-June, I feel fairly comfortable with predicting silver price from my model of silver/gold:

The July fair value of silver is $18.340 in a range of $17.464 to $19.217

This morning the COMEX silver and gold September contracts (most active) are $18.045/oz and 1200.5/oz respectively. It makes sense that silver is presently undervalued with respect to gold because we have been experiencing higher than usual gold/silver ratios (Au:Ag ratio). This can be explained by the heightened level of fear in the marketplace since silver has a broader industrial use than gold and is therefore a precious metal more sensitive to bad economic news. As fear recedes from the markets, silver price should rise relative to gold for a lower Au:Ag ratio.

Another way to say this is to expect silver to regain her more typical greater-than-unity "beta" . 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. 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. The 3-month beta for silver has been a dismal 0.51 (as of 6/30/10); expect an increase.

Molybdenum prices have stabilized in a fairly narrow range throughout this whole May-June fear cycle. In fact since the LME molybenum futures kicked of in February of this year the 3-month seller contract has remained within $30,000-$40,000/metric ton ($13.61-$18.14/lb) except for a brief exuberant bounce in the first week of trading.

The Colonel hasn't developed a molybdenum price model to date since this minor metal is thinly traded. As the futures market matures and more investors are involved it may make sense to do so in the future. Presently molybdenum trades on fundamentals in a tight supply condition. It's relative price stability is good for producers like Thompson Creek (TC) and encouraging for General Moly (GMO) as they enter Mt. Hope mine construction next year.

For a trading range of $30,000-$40,000/metric ton is is instructive to look at both the arithmetic and geometric means (since we have no model):

Arithmetic mean (i.e standard average) = $35,000/metric ton or $15.88/lb
Geometric mean = $34,641/metric ton or $15.71

I tend to favor the geometric mean in understanding the "middle" of trading ranges so let's choose $15.71 as a measure of where we are in the moly pricing world. I'll give moly prices a "GREEN" light on the Eureka Outlook Dashboard if Western moly oxide is above this number; "YELLOW" if it falls below (our old trigger level was $16.50/lb).

Another bit of good local news for General Moly and subsidiary, Eureka Moly LLC, was announced yesterday:


This is a rather creative solution to a critical housing shortage in our town. In the words of our Commissioner Chairman, Lenny Fiorenzi:

"We are very pleased with the support we have received from Eureka Moly and we acknowledge the $5 million it has spent at the site to date; it will make housing more affordable for homebuyers. It's a win-win-win for the County, the mine, and the housing authority."


"By involving Nevada Rural Housing Authority we open doors to federal loans and grants for housing, and bring home buyer financing to Eureka. When the development makes a profit, that money goes back into the community for development of the town's choosing. This will become a true economic development project for us."

On that thought, let's walk the walk:

Our newly minted Eureka Miner's Index (EMI - what's this?) remains sub-par at 89.33 but up from yesterday's 83.31 and a big improvement from the 6/7/10 low of 50.7. Remember an EMI greater than 100 is good times for metals & miners.

4-WD is ON - rough roads in the marketplace; The VIX or "fear index" is above 25; metals & miners remain on shaky timber with benchmark FCX trading in the the 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 GREEN light is turned back on for Commodity Reflation with copper trading above $3/lb

The GREEN light is turned on for Stable Markets the VIX below the 30 level (what's this?)

The YELLOW light is on Investor Confidence as further market corrections are probable but less likely

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 $0.97 in early trading to $72.95 (August contract, most active); Gold is down $1.5 to $1193.6 (August contract, most active); Silver is down $0.042 to $17.815 (July contract, most active); Copper is up $0.0220 to $2.9930 (September contract, most active)

Western Molybdenum Oxide is at $16.00; European Molybdenum Oxide is at $14.00; LME moly 3-month seller's contract is $14.97, LME cash seller is $14.74

The DOW is up 39.43 points to 10,057.71; the S&P 500 is up 1.68 to 1061.95. The miners are up except for the gold diggers:

Barrick (ABX) $42.73 down 2.61%
Newmont (NEM) $58.86 down 1.88%
US Gold (UXG) $4.71 down 1.05%
General Moly (Eureka Moly, LLC) (GMO) $3.21 up 0.94%
Thompson Creek (TC) $9.17 up 0.33%
Freeport-McMoRan (FCX) $62.81 down 0.24% (a bellwether mining stock spanning copper, gold & molybdenum)

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

ArcelorMittal (MT) $29.32 up 0.83% - global steel producer
POSCO (PKX) $102.80 up 1.64% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is is down 0.27% to $1,343,622.48 (what's this?).


Colonel Possum

Note 1: the Colonel's charts are a scatter plot of recent NYMEX/COMEX futures prices (last 3 months) for a commodity (e.g. copper) versus a reference commodity (e.g. gold). The models are updated every month (magenta line) for each commodity pair. The aqua lines show a statistical boundary for current price variations (dark wiggly line) from the model. The most recent prices (last 20 days) are the yellow wiggly line. The blue line is a 20-day moving average of these commodity prices.

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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