"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.

Thursday, December 9, 2010

If Oil is Gold & Copper is Oil, What is Silver?

Morning Miners!

It is 6:15 AM. Our favorite Norseman Thor rustled me out of bed with one of his dad blamed micro-thunderbolts. You probably didn't hear it but my ears are still ringing and my eyebrows are singed - have a hot cup of joe and "Happy Thor's Day"

General Moly Water Application Hearings

The ole Colonel has been keeping his ringing ear to the ground on the General Moly water application hearings that started earlier this week and should wrap up soon. I've received a lot of good G2 from our faithful readers. In fairness to the process and the parties involved, I'll stay quiet until the fat lady sings. Stay tuned.

If you are in catch up mode, the State Engineer set December 6 as the date for protests to the Company's water applications to be heard. Following the hearing, the State Engineer will issue a ruling with respect to these applications.

Copper posts a new high

For the record keepers, COMEX copper has posted a new high besting $4.132/lb set 12/7 with $4.154/lb in the wee hours. Here's where we stand for the big three:

COMEX Gold $1432.5/oz 08:25:00 ET 12/7/2010, February contract most active
COMEX Silver $30.75/oz 08:25:00 ET 12/7/2010, March contract most active
COMEX Copper $4.154/lb 03:00:00 ET 12/9/2010, March contract most active

If oil is gold & copper is oil, what is silver?

Let's finish the day with a Monty-Python-style riddle. Barrick Gold CEO Aaron Regent was asked earlier this year on CNBC Business News whether he thought gold prices were too high. He answered that relative to the price of oil, gold was performing well within historical averages. I believe he said at that time the ratio of gold price to a barrel of oil was about 17. I thought it might be fun to look at the gold/oil ratio (Au:Oil ratio) from September to the present:

From 9/1/2010 to 12/10/2010

Au:Oil = 16.44 bbl/oz (average) 0.42 bbl/oz, 2.6% (standard deviation, % of average)

OK, that's not too far from Mr. Regent's historical 17 bbl/oz. At 16.4 bbl/oz an ounce of gold doesn't buy quite as much oil, so if anything the yellow metal may be slightly undervalued with respect to the slippery stuff. In today's early trading, an ounce of COMEX gold buys you only 15.6 barrels of NYMEX sweet crude ($1389.6/$88.88). In this light, $1400/oz gold doesn't seem all that scary when we're at the doorstep of $90/bbl oil ($1400/$90 = 15.6).

What I find amazing is how little the ratio has changed in 3 months. One standard deviation of price variation is only 2.6% of the average price. Pretty stable oil & gold market I'd say.

Let's do copper and oil. Over the same time period, the ratio of oil to copper (Oil:Cu ratio) is:

Oil:Cu = 21.73 lbs/bbl (average) 0.40, 1.8% (standard deviation, % of average)

One barrel of NYMEX oil buys 21.7 lbs of copper with a variation of less than 2% over the last three months. This morning the ratio is 21.6 with copper falling back just slightly from its earlier high ($88.88/$4.1155). Gee, copper prices don't look too scary either compared to oil. In fact, the copper & oil comparison appears a tad less volatile than oil & gold.

Yesterday we looked at gold/silver ratio (Au:Ag ratio) and found it at levels not seen since early 2007. Let's see how it fares in our September-to-now comparisons:

Au:Ag = 56.11 oz/oz (average) 4.98, 8.9% (standard deviation, % of average)

The average is near the top of the pre-recession range (50 to 56) but the price variation is far greater than seen by either gold or copper compared to oil. This morning we're sitting at 48.35 ($1389.6/$28.740) at the low end of the last 3 months.

So what Colonel? It appears that silver compared to gold has gone through a period of price variability that far exceeds our other relative comparisons. Interestingly it has mimicked the volatility of the broader markets. Here is the volatility of the S&P 500 (VIX) over the same time period.

VIX = 20.19 (average) 1.81, 9.0% (standard deviation, % of average)

So the answer to our riddle is the "Silver is the S&P 500 VIX", at least in relation to the variability of the two over the last three months. I hope your your head doesn't hurt with all this number crunching. Even though their prices seem high; oil, gold and copper appear to be behaving normally when compared to each other - be wary of silver buckaroos.

Daily Market Roundup

Enough talk, let's walk the walk:

Eureka Miner's Index (EMI)

The Eureka Miner's Index(EMI) is above-par at 639.79, up from yesterday's 600.57. The 1-month moving average is 525.37. 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 $0.60 in early trading at $88.88 (January contract, most active); Gold is up $6.4 to $1389.6 (February contract, most active); Silver is up $0.488 to $28.740 (March contract, most active); Copper is up $0.0150 to $4.1155 (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 16.12 points to 11388.60; the S&P 500 is up 5.55 to 1233.83. Miners are singing, Newmont is slightly off-key:

Barrick (ABX) $53.29 up 0.64%
Newmont (NEM) $60.67 down 0.26%
US Gold (UXG) $7.47 up 3.46%
General Moly (Eureka Moly, LLC) (GMO) $5.61 up 1.26%
Thompson Creek (TC) $13.45 up 1.89%
Freeport-McMoRan (FCX) $111.00 up 2.21% (a bellwether mining stock spanning copper, gold & molybdenum)

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

ArcelorMittal (MT) $35.88 up 0.80% - global steel producer
POSCO (PKX) $102.90 up 0.88% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is is up 1.29% to $1,836,734.51 (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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