"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, November 29, 2010

Buy Gold Now? - Metals & Miners Weekly Roundup

Morning Miners!

It is 6:09 AM. Have a cup of just-one-more-turkey-sandwich-left coffee and let's get to work...

Buy Gold Now?

Friday I said that November 9th may have been the market top for the metals & miners, at least for awhile. On that day, COMEX gold and silver set new records at $1424.3/oz and $29.340/oz. COMEX copper followed on the 11th with its new high at $4.0835/lb. The Eureka Miner's Index (EMI) peaked out at a strong 661.3 on 11/9 but has trended down ever since (see discussion and charts below).

The culprit behind this decline has been a long string of scary headlines about Korea and the re-emerging debt crisis in Europe with Ireland, Portugal and Spain in the barrel. Over the weekend, the EU cobbled together a rescue package for Ireland but the euro continued its descent against the U.S. dollar as investors focused on the potential for contagion to the other euro-zone countries in question. Since mid-September gold has been behaving like a commodity, so a strengthening dollar results in falling gold prices.

I woke up this morning with a voice in my head telling me to buy gold. There's at least some reasons why this may be a bad idea. Technically, gold has established a "head-and-shoulders" pattern in its recent ups and downs (see note 1). The SPDR Gold Trust(GLD) which tracks gold price and is part of the Eureka Miner's Grubstake Portfolio peaked on the 9th with COMEX gold at $139.15/share (the "head"). This high is accompanied by earlier and later peaks of lesser magnitude (the "shoulders") as shown in the 6-month chart below (closing prices: $134.75/share 10/14 and $134.41/share 11/23) followed by the recent decline.

This pattern is often a sign of further declines suggesting that we won't be seeing $1400/oz gold again for some time to come. Friday's GLD closing price dropped below its 1-month moving average (red line) along with the Eureka Miner's Index (EMI) (see chart at the bottom of this blog page) which are further bearish signs.

I say nuts to all this! Gold can easily positively re-correlate with the dollar and leave his commodity buddies in the dust as we saw earlier this year during the Greece crisis. My sense is that we're only seeing a pause in gold prices which could easily continue their upward ascent with more lousy headlines from Korea, Europe or the next whoopsy-doopsy. I threw a little gold dust in the buckboard this morning just in case buckaroos. Apparently Dennis Gartman, the Commodity King, also believes in the fortunes of gold in this topsy-turvy world as reported in the Kitco Nuggets this morning:

Market Nuggets: Gartman: Gold Has Become World's Third Most Popular Reserve Currency (Kitco News, 11/28/2010)

If you have any problems finding this nugget (since the Kitco list is refreshed throughout the day), the key quote from the Gartman Letter is: "More properly, we should say that gold shall continue to gain upon the EUR [euro currency] as the propensity on the part of reserve bank asset managers to hold EURs shall weaken at the margins, while their propensity to own gold shall rise. These are tectonic plates shifting very, very slowly but doing so inexorably."

Stay tuned.

Weekly Molybdenum Roundup

Moly prices remain in a stable range for the year sitting slightly above mid-range with Western moly oxide at $15.75/lb just below European moly at $16.20/lb. The LME 3-month seller contract falls between these two prices at $15.88/lb. The Report's mid-range price target for 2010 moly prices is $15.71/lb.

Western Moly Oxide $15.75/lb (the price tracked by Base Metals on the General Moly Website)

Moly Oxide, Europe (Mo Drummed Molydbic Oxide EU) $16.20/lb (the price reported in the Metals Bulletin)

LME Futures Contracts

LME cash seller is at $34,500/metric ton $15.651/lb

3-Month (Buyer) $33,000/metric ton $14.97/lb
3-Month (Seller) $35,000/metric ton $15.88/lb

15-Month (Buyer) $33,000/metric ton $14.97/lb
15-Month (Seller) $35,000/metric ton $15.88/lb

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

Eureka Miner's Index (EMI)

The Eureka Miner's Index (EMI) gives us the market temperature for the sectors that have the greatest impact on mining in Eureka County. Below is a chart of the EMI at Friday's close. The magenta line is the 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). A 1-month moving average is given by the blue line. A larger and more readable chart appears near the bottom of this blog page.

The Eureka Miner's Index(EMI) this morning is above-par at 369.81 continuing a down trend, down from Friday's close of 408.33, and falling below the 1-month moving average for a second consecutive time. Today's 1-month moving average is 463.81. The 2010 record high for the EMI is 661.28 set 11/9/2010; the low was set 6/7/2010 at 50.7. Although an EMI greater than 100 signals better times for the metals & miners relevant to Eureka County, the EMI has reversed direction and is now trending down.

200-day averages are used in the EMI to normalize current mining company share price and are updated monthly. Upper and lower trend lines are updated weekly.

Oil & Copper Correlations with Gold

Oil & copper correlations with gold give us insight into what may happen next for the metals & miners.

Here are the latest correlations given this morning's NYMEX/COMEX trading:

Oil/Au correlation +0.7869 (1-month) +0.9212 (3-month)
Cu/Au correlation +0.8016 (1-month) +0.9463 (3-month)
Cu/Oil correlation +0.8974 (1-month) +0.9396 (3-month)

Here are the numbers from the last Monday's roundup (11/22/2010):

Oil/Au correlation +0.8905 (1-month) +0.9383 (3-month)
Cu/Au correlation +0.8725 (1-month) +0.9669 (3-month)
Cu/Oil correlation +0.9075 (1-month) +0.9490 (3-month)

Interestingly the oil & copper correlations, although high, are starting to de-correlate slightly from gold. It is important to watch to see if this behavior continues lending support to the Colonel's "buy gold now" argument.

Daily Market Roundup

Enough talk, let's walk the walk:

Eureka Outlook Dashboard

4-WD is OFF - cautious going in the marketplace although we're still above our key warning thresholds; The VIX or "fear index" is below 25; bellwether Freeport-McMoRan (FCX) in the mid-$90s above its 200-day average of $75.91 (our new warning level, 11/01 update); 10-year Treasurys are safely below 4% preserving a low-interest rate environment but there is still some deflationary caution now that we are sub-3%.

The GREEN light is turned back on for Commodity Reflation with copper trading comfortably above $3.50/lb

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

The YELLOW light is turned on for Inflation/Deflation Watch as the Federal Reserve resumes buying Treasurys (QE2)and the 10-yr T-Note remains below 3.00%

The GREEN light is turned back on for Investor Confidence as investment returns to the equity markets but the bond markets may flag trouble ahead

The YELLOW light is turned on our Fuel Gauge with oil above $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?)

Commodity Market Morning Update

NYMEX/COMEX: Oil is up $0.54 in early trading at $84.30 (January contract, most active); Gold is down $0.1 to $1364.2 (February contract, most active); Silver is up $0.063 to $26.835 (March contract, most active); Copper is up $0.0085 to $3.7710 (March contract, most active)

Western Molybdenum Oxide is $15.75; European Molybdenum Oxide is $16.20; LME moly 3-month seller's contract is $15.88, LME cash seller is $15.65

Stock Market Morning Update

The DOW is down 148.53 points to 10943.47; the S&P 500 is down 13.50 to 1175.90. Miners are down:

Barrick (ABX) $49.60 down 1.65%
Newmont (NEM) $57.73 down 1.38%
US Gold (UXG) $5.64 down 0.35%
General Moly (Eureka Moly, LLC) (GMO) $5.41 down 2.35%
Thompson Creek (TC) $12.18 up 0.98%
Freeport-McMoRan (FCX) $96.66 down 1.29% (a bellwether mining stock spanning copper, gold & molybdenum)

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

ArcelorMittal (MT) $31.14 down 1.74% - global steel producer
POSCO (PKX) $96.90 down 0.31% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is is down 1.15% to $1,661,928.24 (what's this?).


Colonel Possum

Note 1: Head and Shoulders Pattern - A technical analysis term used to describe a chart formation in which a stock's price:

1. Rises to a peak and subsequently declines.
2. Then, the price rises above the former peak and again declines.
3. And finally, rises again, but not to the second peak, and declines once more.

The first and third peaks are shoulders, and the second peak forms the head.

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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