"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.

Monday, August 23, 2010

Good Time to Buy Silver or Sift Sand for Bean Gold?

Morning Miners!

It is 5:54 AM. Let me pour you a cup of Monday motivation and let's get to work. It looks like today may prove to be a study in contrasts. There are at least two camps of opinion on where we're headed next. In the past, these settlements have been at different points on the river of global recovery; now it appears they are in different canyons. If you hang out in the camp of stock markets, life isn't great but there is still water in the sluice and a promise of more glitter in the pan when the river rises. Over the ridge in double-dip canyon, recovery creek has slowed to a trickle and those campers are hunkering down for a drought, sifting through dry sand for "bean" gold (note 1).

There are a lot of bond traders in the dry camp so let's start with a look at 10-year Treasury yields. This morning we are at levels comparable to the worst day in recent memory for the metal & miners. In December 2008, folks were fearing a run on the banks, copper was trading at $1.30/lb and our bellwether miner Freeport-McMoran hit rock bottom:

10-yr Treasury 2.657% - 12/5/2008: Freeport-McMoran bottom ($16.8, $15.7 intraday)
10-yr Treasury 2.632% - 8/23/2010: This morning

To broaden this comparison let's throw in the worst day this year for the metals & miners which occurred June 7th during the spring commodity massacre:

10-yr Treasury 3.146% - 6/7/2010

Bond yields move inversely to bond price, so low yields indicate that many investors are piling into the Treasury safe haven now as they did during the worst days of the credit crisis.

In the camp with running water, the miners are whistling a much happier tune. This Report uses the S&P 500 Volatility Index (VIX) to gauge fear in the stock market. Here is the VIX and Eureka Miner's Index (EMI) for our three example days (VIX greater than 25 indicates fear in the marketplace, an EMI greater than 100 is bullish for miners):

12/5/2008 VIX = 59.9 EMI = 1.15
6/7/2010 VIX= 36.6 EMI = 50.7
8/23/2010 (this morning) VIX = 24.7 EMI = 129.3

Today as we teeter below the threshold of fear at 24.7 and witness a healthy above-par 129.3 for the EMI, who has a care in the world?

Another gauge of market fear is the ratio of gold to silver prices. This morning COMEX gold is trading at $1229.4/oz and silver at $17.960/oz. The gold-silver ratio (or Au:Ag) is therefore 68.4 (i.e. $1229.4/$17.960). This is comparable to levels seen last June but still lower than in 12/08 (an Au:Ag in the range of 50-56 is typical in less fearful, non-recessionary times):

12/5/2008 Au:Ag = 79.3
6/7/2010 Au:Ag = 68.3
8/23/2010 (this morning) Au:Ag = 68.4

The present Au:Ag ratio suggests investors are still running to gold as a safe haven also, at least relative to silver prices. Let's finish our comparisons by looking at bellwether miner Freeport McMoran and copper prices again for these three dates:

12/5/2008 FCX $16.8 COMEX copper $1.30/lb
6/7/2010 FCX $58.66 up 249% COMEX copper $2.7660/lb up 113%
8/23/2010 FCX $72.02 up 329% COMEX copper $3.2830/lb up 153%

Who's right and who's wrong? If you are in the optimist camp you may believe gold will trend higher with metal prices and the silver-gold ratio will fall as fear recedes from the marketplace. The happy campers may think about throwing a little silver in their saddle bags for safe keeping at these levels.

The worst pessimists in the dry camp see disinflation (i.e. decreasing rate-of-inflation) leading to deflation followed eventual hyper-inflation. In this scenario gold and silver prices will fall or move sideways for some time then rocket to the moon as paper money is used to start campfires. If you are one of these folks, you may want to wait for Au:Ag ratios to hit the 70-80s before loading up on silver to add to your growing pile of bean gold.

The ole Colonel is forever an optimist and it's more fun to sit by a running creek with a band of merry fools (or wise men, time will tell). The good news is that precious metals are always a good thing to have around no matter which camp you're in. I'd personally wait for Au:AG to rise a little more before thinking about buying more silver at these prices...but we're getting closer buckaroos.

Let's see how our Miss Moly fared last week:

Weekly Molybdenum Roundup

Molybdenum prices remain in a stable range with Western moly oxide still at $14.75/lb a dollar lower than European moly. The LME 3-month and 15-month seller contracts are now $16.33/lb ($36,000/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) $15.75/lb (the price reported in the Metals Bulletin)

LME Futures Contracts

LME cash seller is at $34,050/metric ton $16.06/lb

3-Month (Buyer) $34,000/metric ton $15.42/lb
3-Month (Seller) $36,000/metric ton $16.33/lb

15-Month (Buyer) $34,000/metric ton $15.42/lb
15-Month (Seller)$36,000/metric ton $16.33/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 129.32, a bit up from Friday's 123.77 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 but improving roads in the marketplace; The VIX or "fear index" is just below 25; metals & miners are on firmer timber with bellwether Freeport-McMoRan (FCX) in the low-$70s below 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 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 $0.10 in early trading to $73.92 (October contract, most active); Gold is up $0.6 to $1229.4 (December contract, most active); Silver is down $0.031 to $17.960 (September contract, most active); Copper is down $0.0080 to $3.2830 (September contract, most active)

Western Molybdenum Oxide is $14.75; European Molybdenum Oxide is $15.75; LME moly 3-month seller's contract is $16.33, LME cash seller is $16.06

The DOW is up 75.00 points to 10,288.62; the S&P 500 is down 8.20 to 1079.89. The miners are mixed:

Barrick (ABX) $44.49 down 0.65%
Newmont (NEM) $57.97 down 0.09%
US Gold (UXG) $4.95 up 0.81%
General Moly (Eureka Moly, LLC) (GMO) $3.17 up 1.60%
Thompson Creek (TC) $9.04 up 1.35%
Freeport-McMoRan (FCX) $72.02 up 0.91% (a bellwether mining stock spanning copper, gold & molybdenum)

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

ArcelorMittal (MT) $30.05 up 0.67% - global steel producer
POSCO (PKX) $105.89 down 0.30% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is is up 0.49% to $1,377,395.15 (what's this?).


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: During the Great Depression many poor miners sifted dry sand for placer gold in hopes that a day's find would be enough to buy a can of beans.

Headline photograph by Mariana Titus

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