"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.

Friday, December 10, 2010

The Colonel's Gold & Silver Predictions for 2011

Morning Miners!

It is 6:14 AM. Scott Raine brought us over some of his special blend Jingle Bell Java for the holidays. My ears are already ringing - have a cup and let's see what the precious metal Ouija board has to say for 2011.

The Colonel's Gold & Silver Predictions for 2011

As I've said many times in this Report, predicting commodity prices is a fool's errand but the ole Colonel is a happy fool. There are few things I enjoy more than betting on gold & silver prices for a new year. We've spent a good part of this week scratching our heads on the recent trends of oil, gold, silver and copper. On Wednesday I said in the monthly Oil & Metals Outlook, "In my view, $1500+ gold is a slam dunk for 2011" and "I bet we will see $100+ oil some time in 2011."

Let's close the week drilling just a little deeper on these claims. Yesterday I mentioned that Barrick Gold CEO Aaron Regent said earlier this year that the price of gold was not too high when compared to oil. As I recall, he used a historical gold/oil ratio of around 17 to illustrate his point. We checked the last three months of NYMEX/COMEX price data and came up with a number very close to his, if anything gold appeared slightly undervalued with respect to oil.

There is a growing consensus in the oil & gas community that we will see $100+/bbl next year. On CNBC Business News yesterday, I heard one expert say he thought it may happen as soon as the first quarter; another said before mid-year. The logic behind this prediction is increasing demand from the emerging economies even if the U.S. and Europe are stuck in low gear coupled with the increasing likelihood of a geo-political scare from any number of hot spots (e.g. Iran, Korea). If you believe this story, the Barrick number gives you $1700/oz gold. This makes some sense because oil and gold prices tend to rise together during scary times.

This isn't always true, we saw oil prices decline and gold prices increase during the European sovereign debt crisis earlier this year. Even though this crisis has re-emerged as a concern for 2011, the global growth story appears to be back on track so I'll bet oil and gold run together for the most part. Yesterday we looked at the past three months and calculated the oil/gold ratio to be 16.44 with less than 3% variation. Assuming this continues into 2011 we can develop a mean gold price and range given $100/bbl oil (see note 1):

The mean gold price is $1644/oz (100x16.44) in a range of $1560/oz to $1728/oz

Alternatively, my December oil/gold model for the same period of data gives us $1570/oz gold for $100/bbl oil. This number lies just above the low range and Aaron Regent's ratio gives us a price a tad below the high range. Comme Ci, Comme Ça.

If we use my $1570/oz, the Colonel's silver/gold model predicts the following for silver price given $100/bbl oil:

The fair price of COMEX silver is $35.978/oz in a range of $35.978/oz to $38.004/oz

That's enough number crunching for me to place bets that the following price events will occur prior to the Fourth of July 2011:

NYMEX light crude will break $100/bbl

COMEX gold will break $1570/oz

COMEX silver will break $36/oz

Now, that wasn't so hard was it? Stay tuned buckaroos.

You can review this and my other bets in The Colonel's Beer Derby at the bottom of the column to the right of this blog.

Daily Market Roundup

Enough prognostication, let's walk the walk:

Eureka Miner's Index (EMI)

The Eureka Miner's Index(EMI) is above-par at 650.78, up slightly from yesterday's 639.79. The 1-month moving average is 527.72. The 2010 record high for the EMI is 739.13 set 12/7/2010; 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 EMI reversed its downward trend last Friday.

Eureka Outlook Dashboard

4-WD is OFF - Stable conditions in the marketplace; The VIX or "fear index" is below 25; bellwether Freeport-McMoRan (FCX) is 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 up $0.02 in early trading at $88.39 (January contract, most active); Gold is down $12.0 to $1380.8 (February contract, most active); Silver is down $0.352 to $28.465 (March contract, most active); Copper is up $0.0325 to $4.1195 (March contract, most active)

Western Molybdenum Oxide is $15.75; European Molybdenum Oxide is $16.05; LME moly 3-month seller's contract is $15.87, LME cash seller is $15.64

Stock Market Morning Update

The DOW is up 15.51 points to 11385.57; the S&P 500 is up 2.55 to 1235.55. Miners are mixed:

Barrick (ABX) $53.35 down 0.06%
Newmont (NEM) $59.99 down 0.45%
US Gold (UXG) $7.47 down 1.19%
General Moly (Eureka Moly, LLC) (GMO) $5.56 up 1.00%
Thompson Creek (TC) $13.36 up 0.23%
Freeport-McMoRan (FCX) $111.62 up 0.87% (a bellwether mining stock spanning copper, gold & molybdenum)

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

ArcelorMittal (MT) $35.88 up 0.63% - global steel producer
POSCO (PKX) $102.27 down 0.89% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is is down 0.38% to $1,830,478.49 (what's this?).


Colonel Possum

Note 1: The standard deviation of the oil/gold ratio over this period is 0.42 bbl/oz or roughly 2.6% of the mean at 16.44 bbl/oz. The gold price range was computed using two-standard deviations from the mean oil/gold ratio.

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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