"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, December 6, 2010

$30+ Silver? Moly Contango - Metals & Miners Weekly Roundup

*** BREAKING NEWS *** COMEX silver breaks $30 for a new high of $30.355/oz (15:45:00 ET) - March contract, most active

*** BREAKING NEWS *** General Moly (GMO) breaks $6.00/share for a new high of $6.15 (1:18 PM ET)on high trading volume

*** BREAKING NEWS *** COMEX silver breaks $30 for a new high of $30.12/oz (11:30:00 ET) - March contract, most active

Morning Miners!

It is 6:08 AM. Grab a cup of Monday joe. Looks like an exciting week ahead for the metals & miners with silver setting a new record, gold not far behind and Miss Moly learns the contango. Let's get to work...

$30+ Silver?

In the wee hours COMEX silver set a new record at $29.980/oz, just two cents shy of $30/oz (01:45:00 ET). COMEX Gold tried shortly after pegging $1420.0 (02:30:00 ET) but falling $4 short of its November 9th high. Are we looking at $30+ silver soon?

The ole Colonel has been right and then cautious about silver, maybe too cautious. Last August I felt it was a good time to buy silver (Good Time to Buy Silver?, 8/23/2010). At that time silver was $17.96/oz and gold, $1229.4/oz. The closely watched gold/silver ratio (Au:Ag ratio) was a lofty 68.45 signaling some fear in the marketplace but also a lot of room for silver to rise in price (if gold trended higher) to reach pre-recession ratios of 50-56.

I'll take some credit for a good call as today's silver high is some 67% above the late August price. In the November 22nd Weekly Roundup I put the jake brake on my enthusiasm for silver and warned, "Tread carefully buckaroos, at today's prices silver may headed for a correction." At the time of that blog, silver was trading at $27.21/oz and gold at $1352/oz for a ratio of just below the pre-recession range (1352/27.21 = 49.7).

To give this some perspective here is a chart of the Au:Ag ratio for the last 5 years.

Today's silver price reaches a ratio not seen since spring of 2008. Silver may indeed trend higher with gold from here but the historical margin for doing so is much smaller than it was this summer. My models also continue to show an overvalued condition for silver. 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):

Last Friday (12/03), silver price was very close to the(aqua)upper bound. This morning's price remains hugging the line. There are a lot of animal spirits behind this precious metal presently but the ole Colonel is not a buyer at these levels.

Miss Moly Dances the Contango

Last week ended in an interesting market condition for molybdenum called "contango.". It is actually a quite normal situation for the more heavily traded base metals. Contango occurs when the price of a commodity for future delivery is higher than the spot price, or a far future delivery price is higher than a nearer future delivery. Last week both cases were true for molybdenum:

Spot prices

Moly (Western) $15.75/lb
Moly (Europe) $16.05/lb

London Metal Exchange (LME) Moly Futures

cash seller $16.56/lb
3-month seller $16.78
15-month seller $17.37

Moly prices are now following a nice staircase in price showing some investor confidence that moly prices will rise in the near and mid-term. Spot and futures prices are all above the Report's mid-range price target for 2010 of $15.71/lb, a bullish sign.

The opposite market condition to contango is known as "backwardation" which we have recently witnessed in the copper market. Here is the detail pricing for molybdenum for last week:

Weekly Molybdenum Roundup

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) $16.05/lb (the price reported in the Metals Bulletin)

LME Futures Contracts

LME cash seller is at $36,500/metric ton $16.56/lb

3-Month (Buyer) $35,000/metric ton $15.88/lb
3-Month (Seller) $37,000/metric ton $16.78/lb

15-Month (Buyer) $36,300/metric ton $16.47/lb
15-Month (Seller) $38,300/metric ton $17.37/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) set a new record at the close of last Friday's markets. Today the EMI is above-par at 625.10, just below Friday's close at 682.00. The 1-month moving average is 490.93. The new 2010 record high for the EMI is 682.00 set 12/03/2010; the low was set 6/7/2010 at 50.7. An EMI greater than 100 signals better times for the metals & miners relevant to Eureka County, the Friday close re-establishes an upward trend.

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 +0.8843 (1-month) +0.9137 (3-month)
Cu/Au correlation +0.8249 (1-month) +0.9394 (3-month)
Cu/Oil correlation +0.9021 (1-month) +0.9307 (3-month)

Here are the numbers from the last Monday's roundup (11/29/2010):

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))

All these correlations remain very high and positive which is a bullish condition for the metals & miners but $90/bbl may soon be on the horizon.

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 low-$100s above its 200-day average of $79.39 (our new warning level, 12/06 update); 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 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 Watch as the Federal Reserve resumes buying Treasurys (aka QE2)

The GREEN light is turned back on for Investor Confidence as investment returns to the equity markets

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 $0.35 in early trading at $88.84 (January contract, most active); Gold is up $8.5 to $1414.7 (February contract, most active); Silver is up $0.369 to $29.640 (March contract, most active); Copper is down $0.0025 to $3.9965 (March contract, most active)

Western Molybdenum Oxide is $15.75; European Molybdenum Oxide is $16.05; LME moly 3-month seller's contract is $16.56, LME cash seller is $16.78

Stock Market Morning Update

The DOW is down 28.08 points to 11354.01; the S&P 500 is down 3.98 to 1220.73. Miners are mixed:

Barrick (ABX) $54.51 up 0.57%
Newmont (NEM) $62.83 up 1.00%
US Gold (UXG) $7.39 up 3.21%
General Moly (Eureka Moly, LLC) (GMO) $5.62 down 0.30%
Thompson Creek (TC) $13.09 down 0.23%
Freeport-McMoRan (FCX) $110.41 up 1.34% (a bellwether mining stock spanning copper, gold & molybdenum)

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

ArcelorMittal (MT) $35.22 up 0.92% - global steel producer
POSCO (PKX) $103.44 down 0.61% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is is up 0.81% to $1,845,348.34 (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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