Monday, August 16, 2010
Eureka Housing Update - Gold Breaks 6-week High
It is 5:54AM. Have a cup of Monday go-java and let's get to work. We've got a terrific update this morning on the Eureka Canyon Subdivision from a faithful reader and contributor to the Report. We'll cover that in a moment but first, how about a Sunday bedtime story to start the week?
When I turned in last night it was already "today" in Shanghai, China and their composite index was up 1.71%, COMEX copper popped up 0.63% and COMEX gold crested $1219.4/oz. The ole Colonel thought, "not a bad way to start a new week." Watching Chinese markets is a little tricky not only for their volatility and suspected government fiddling but they are often reactionary. Instead of giving you an eye to the future they sometimes only reflect yesterday's news in the western developed world. Sometimes not.
For all the negatives (and we certainly can't say that our own government doesn't meddle in markets given near zero interest rates!), some metals & miners are quite correlated with Chinese stock indexes. To illustrate that point, here is a 6-month chart of the Shanghai Composite Index (orange line) and COMEX copper (blue line):
If these two were marching in a parade, I doubt the drill sergeant would be hollering at either to stay in step.
Secondly, Chinese market downturns have been fairly reliable leading indicators for our own market oopsy-daisies for the last several years. As pointed out by this Report in the past, the tight correlation of copper and copper giant Freeport-McMoRan (FCX) with Chinese markets also makes them good indicators of things to come. The dramatic drop in copper and FCX share price in December of 2008 presaged the S&P 500 bottom in March of 2009; the downturn of copper and FCX in early April was the opening act for the May-June commodity massacre of this year. So a good start in Shanghai together with rising copper prices is nothing to ignore, pardner, especially now that China is expected to surpass Japan this year as the world's second-largest economy.
This Report has said that gold and copper need to get back in step to sustain present metal prices. This has clearly not been the case as shown by this 6-month chart of copper (blue line) and gold (orange line):
Lately, gold and copper have been moving together again as confirmed by the recent rally in gold prices. This morning COMEX gold broke a 6-week high at $1229.5/oz, here is a similar response in the London spot market:
The irony is that some of this move is attributed to market distrust of economic recoveries in the United States, Japan and Europe given the latest stream of gloomy data. Another bearish sign is the 10-year Treasury plunging below 2.6% this morning. I can't pretend to sort all this out but I do trust the metals. If we can keep copper and gold on the mend, there is probably hope for the larger macro-economic story. Goldman Sachs is bullish on copper, oil and gold and that's good sign:
Goldman Maintains `Overweight' Commodities Call, Backs Copper, Oil, Gold (Glenys Sim, Bloomberg News, 8/16/2010)
Time will tell who is right so let's turn to something that is happening now...
Eureka Housing Update
The Report has been following the acute Eureka housing shortage for some time (Eureka Housing Shortage). The Eureka County Commissioners recently took over a housing project started by General Moly (GMO) to provide housing for the Mt. Hope molybdenum mine construction which is expected to begin next summer (General Moly Good News, 7/8/2010). This should prove a win-win for both our town and their mine; the Nevada Rural Housing Authority (NRHA) has been selected for the next phase of housing development.
A trusted reader of the Report gave this account of a meeting with the NRHA last Thursday (8/12/10):
"...Eureka County agreed to do a government to government loan to NRHA yesterday. Complete details of the loan will be worked out in future weeks, but the amount will be in the neighborhood of $7 million. It’s a take-out loan so the money is lent as NRHA requests dollar amounts for the project. The county has the ability to charge interest and fees and will more than likely utilize a third party to facilitate and underwrite the loan. It is my understanding that we are looking at interior utility development (water, sewer, power, roads) inside of phase 1 of the subdivision to start with. We are waiting for the results of the housing study to come in which will certainly influence the project’s ultimate direction. We will be meeting again with NRHA on September 7th with the hope of accepting a subdivision plan and development plan."
As previously reported, the NHRA proposed development included two model homes, 50 apartment units and construction of the administration building which will be used for property and apartment management as well as lot and home sales. Lot sizes will be around 9500 square feet and home sizes can range from 1200 to 2000 square feet. Based on an average median income level of $64,500 for Eureka, price point is probably going to be from $130,000 to $175,000. NHRA plans to construct stick built structures and they have the 50 apartment units ready to be erected.
Let's see how our Miss Moly fared last week:
Weekly Molybdenum Roundup
Molybdenum prices remain in a stable range with Western moly oxide moving up to $14.75/lb to narrow the gap with with European moly and LME futures contracts. The LME 3-month and 15-month seller contracts are now $15.65/lb ($34,000/metric ton). The Report's mid-range price target for 2010 moly prices is $15.71/lb.
Western Moly Oxide (FeMo65) $14.75/lb (the price tracked by Base Metals on the General Moly Website)
Moly Oxide, Europe (Mo Drummed Molydbic Oxide EU) $15.45/lb (the price reported in the Metals Bulletin)
LME Futures Contracts
LME cash seller is at $34,050/metric ton $15.44/lb
3-Month (Buyer) $33,500/metric ton $15.19/lb
3-Month (Seller) $34,500/metric ton $15.65/lb
15-Month (Buyer) $33,500/metric ton $15.19/lb
15-Month (Seller)$34,500/metric ton $15.65/lb
Here is a chart of the LME 3-month contract (seller) from the February launch to the present:
Eureka Miner's Index (EMI)
Below is a chart of the Eureka Miner's Index (EMI) with a low interest cap of 3% on 10-year Treasurys (LIRC) and adjustments for gold and silver prices (i.e., Au:Ag ratio). The EMI gives us the market temperature for the sectors that have the greatest impact on mining in Eureka County (a larger more readable chart appears at the bottom of this blog page).
The Eureka Miner's Index is above-par at 115.7, a bit up from Friday's 111.30 close and a big improvement from the 6/7/10 low of 50.7. Importantly, the high and low trends (dotted lines) remain positive since the EMI high on 6/25. Remember an EMI greater than 100 is good times (or at least better times) for metals & miners.
Enough talk, let's walk the walk:
4-WD is ON - rough roads in the marketplace; The VIX or "fear index" remains above 25; metals & miners remain on shaky timber with bellwether Freeport-McMoRan (FCX) in the low-$70s after being recently near its 200-day average of $75.3 (our new warning level, 8/05 update); 10-year Treasurys are safely below 4% preserving a low-interest rate environment but there is some deflationary caution now that we are sub-3%.
The YELLOW light is turned back on for Commodity Reflation. Although copper is trading above $3/lb, the 10-yr T-Note is solidly below 3.00%
The GREEN light is turned on for Stable Markets the VIX below the 30 level (what's this?)
The YELLOW light is turned on for Inflation/Deflation Watch as the Federal Reserves resumes buying back Treasurys and the 10-yr T-Note remains below 3.00%
The YELLOW light is turned back on for Investor Confidence as the bond markets signal trouble ahead
The GREEN light is turned on our Fuel Gauge with oil dropping 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, U.S. House committee debates miner workplace safety bill
Otherwise, all lights are green on the Eureka Outlook Dashboard (upper right, what's this?)
NYMEX/COMEX: Oil is up $0.23 in early trading to $75.62 (September contract, most active); Gold is up $9.9 to $1226.3 (December contract, most active); Silver is up $0.306 to $18.415 (September contract, most active); Copper is up $0.0430 to $3.2950(September contract, most active)
Western Molybdenum Oxide is $14.75; European Molybdenum Oxide is $15.45; LME moly 3-month seller's contract is $15.65, LME cash seller is $15.44
The DOW is down 42.00 points to 10,261.45; the S&P 500 is down 4.33 to 1074.92. The miners are up:
Barrick (ABX) $43.56 up 1.49%
Newmont (NEM) $57.60 up 1.55%
US Gold (UXG) $4.74 up 1.72%
General Moly (Eureka Moly, LLC) (GMO) $2.99 up 2.40%
Thompson Creek (TC) $8.95 up 0.79%
Freeport-McMoRan (FCX) $71.10 up 1.46% (a bellwether mining stock spanning copper, gold & molybdenum)
The Steels are mixed, (a "tell" for General Moly & Thompson Creek):
ArcelorMittal (MT) $30.21 up 0.03% - global steel producer
POSCO (PKX) $102.84 down 0.10% - South Korean integrated steel producer
The Eureka Miner's Grubstake Portfolio is is up 0.84% to $1,352,577.04 (what's this?).
Write Colonel Possum at email@example.com for answers to your questions or to request e-mail updates on the market
Headline photograph by Mariana Titus