"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 22, 2010

A New Season Begins - Metals & Miners Weekly Roundup

Morning Miners!

It is 6:18 AM. Pour yourself a hot cup of Monday joe and let's kickoff a new season for the Eureka Miner's Market Report. Miss Moly, Sweet Ruby Tuesday, Old Miner Woden and our favorite Norseman Thor can't wait to start rolling again...

The Colonel's Metal Outlook for November

At our last Monday roundup in early October, the ole Colonel predicted we'd see $3.90/lb copper by turkey day. On the 11th of November, COMEX copper set a new high at $4.0835/lb. COMEX gold and silver have had quite a run too both setting new records on the 9th of this month at $1424.3/oz and $29.340/oz. With a strengthening U.S. dollar we've fallen off these highs but things remain bullish for metals at least in the near term. We'll look at some of the drivers behind these moves in the coming days and explore whether early November was a top or if there is more upside as we near year's end.

For today, let's assume gold returns to $1400/oz territory before long. If we choose $1400/oz as a nominal price point, my models give these price ranges for copper and silver:

The fair value of COMEX copper is $3.9654/lb in a range of $3.8408/lb to $4.0900/lb

The fair value of COMEX silver is $25.461/oz in a range of $24.622/oz to $26.300/oz

The top range for copper would return us to just a thin flat washer above it's recent record. Silver, however, falls several dollars short of it's recent spike ($26.300/oz versus $29.340/oz). This morning COMEX silver is sitting at $27.210/oz with gold hovering at $1352/oz suggesting an overvalued condition for the former.

Another way to look at silver's relative value to gold is the gold/silver ratio (Au:Ag). Lately we have been at pre-recession levels around 50:

silver price = Gold Price / (Au:Ag)
silver price = $1400/oz nominal / 50 = $28/oz

If fear returns to the marketplace this ratio could return to levels near 70 seen in early June of this year:

silver price = $1400/oz nominal / 70 = $20/oz

Tread carefully buckaroos, at today's prices silver may headed for a correction.

For you chart buffs, the following shows COMEX silver versus gold based on the last 3-months of futures data. The magenta line is "fair value"; the aqua lines represent the upper and lower bounds of the price range. The squiggly lines connect actual price data; yellow is most recent (3-months), blue is older data (a larger and more readable chart is given near the bottom of the blog page):

The latest prices are racing far outside the aqua bands - a time for caution with this precious metal.

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 $34,625/metric ton $15.71/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) is above-par at 526.33, slightly down from Friday's close of 567.33 but towering above the 6/7/10 low of 50.7. The 1-month moving average is 432.31. The new 2010 record high for the EMI is 661.28 set Tuesday, 11/9/2010. Remember an EMI greater than 100 is improving times for the metals & miners relevant to Eureka County.

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. One way to visualize these correlations with gold over time is to plot the "near-term" 3-month versus the "short-term" 1-month correlations (aka "rho") as shown below in these two graphs (ref: China to the Rescue?):

In the case of copper versus gold, we start out on 4/27/10 with both positively correlated (i.e. in the "+,+" or "green" quadrant). This is shortly after early year highs in copper and the S&P 500. We soon descended into negative territory (i.e. in the "-,-" or "red" quadrant) as the financial crisis in Europe worsened (blue line). Presently we are back in the "+/+" or "green" quadrant with tighter positive correlations than our starting point - the magenta line shows the most recent data and direction. To sustain optimism for copper prices we need to stay in the "+,+" green pasture.

Oil versus gold has a similar trajectory starting 5/4/2010 moving from the "+/+" to "-/-" quadrant. Oil has also re-established a very high positive correlation with gold. The graphs above are up to Friday's close, 11/19/2010.

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

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)

Here are the numbers from the last Monday roundup in October (10/4/2010):

Oil/Au correlation +0.5862 (1-month) -0.2204 (3-month)
Cu/Au correlation +0.8939 (1-month) +0.8018 (3-month)
Cu/Oil correlation +0.6548 (1-month) +0.0621 (3-month)

Daily Market Roundup

Enough talk, let's walk the walk:

Eureka Outlook Dashboard

4-WD is OFF - improving roads in the marketplace; The VIX or "fear index" is below 25; metals & miners are on firm timber with bellwether Freeport-McMoRan (FCX) in the low-$100s 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 down $0.32 in early trading at $81.66 (January contract, most active); Gold is down $0.3 to $1352.0 (December contract, most active); Silver is up $0.031 to $27.210 (December contract, most active); Copper is down $0.0385 to $3.7950 (December 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 $15.71

Stock Market Morning Update

The DOW is down 84.68 points to 11118.87; the S&P 500 is down 7.38 to 1192.35. Miners are down:

Barrick (ABX) $49.62 down 0.30%
Newmont (NEM) $60.23 down 0.18%
US Gold (UXG) $5.55 down 1.25%
General Moly (Eureka Moly, LLC) (GMO) $5.55 down 0.54%
Thompson Creek (TC) $12.63 up 0.08%
Freeport-McMoRan (FCX) $101.08 down 0.70% (a bellwether mining stock spanning copper, gold & molybdenum)

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

ArcelorMittal (MT) $33.08 down 3.36% - global steel producer
POSCO (PKX) $100.15 down 0.25% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is is down 0.66% to $1,697,918.85 (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

Headline photograph by Mariana Titus

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