"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.

Wednesday, December 8, 2010

Raging Bull or Sleepy Bear? The Colonel's Oil & Metals Outlook for December

*** BREAKING NEWS *** COMEX trading concluded with a bearish reversal pattern from the gold record of $1432.5/oz set yesterday with lower highs ($1405.4 vs $1432.5), lower lows ($1384.4 vs $1396.7) and a lower close ($1382.2 vs $1409.0)- February contract, most active.

COMEX silver, also setting a new high yesterday at $30.75/oz, closed with a similar reversal pattern at $28.01/oz, down 8.9% from the previous high - March contract, most active.

Morning Miners!

It is 6:52 AM. Grab a cup of hump day joe and let's enjoy the silence. After he fired up the day, Ruby took Old Miner Woden off my hands until next week. That old codger will be driving her crazy up in Elko instead of me down here. Good time to hose out the hi-bay where he's been camping since the cold set in...

The Colonel's Oil & Metals Outlook for December

This is a lousy day to be making predictions about oil & metal prices after yesterday's reversal in gold price and oil dropping back below $90/bbl on bigger than expected inventories. After COMEX gold set a new record at $1432.5/oz it soon fell below $1400 to $1396.7 and then crawled back up to $1490.0 to close. This morning we're back below $1400 at $1391.3.

Nut's, I'm not scared. The ole Colonel remains bullish on gold prices for 2011 given the re-emerging European sovereign debt crisis, jitters about municipal debt and the possibility of a big state credit crunch (think California) all camping out in the next canyon over. This year may not close as a raging bull but if things are beginning to look bearish for metal prices, I believe we only have a sleepy bear. Let's look at both cases.

Raging Bull

I have updated all my models for December and their price charts appear at the bottom of the blog page. In my view, $1500+ gold is a slam dunk for 2011 so let's assume we get halfway up from $1400 by New Years. For the Raging Bull case, let's go with a nominal price of $1450/oz for December. Here are the Colonel's predictions for oil, silver and copper:

The fair value of NYMEX oil is $90.34/bbl in a range of $87.18/bbl to $93.50/bbl

The fair value of COMEX silver is $29.74/oz in a range of $27.713/oz to $31.765/oz

The fair value of COMEX copper is $4.1112/lb in a range of $4.0015/lb to $4.2209/lb

Sleepy Bear

For the Sleepy Bear case, let's assume that COMEX gold returns to its 1-year trend line for a nominal price of $1350/oz for December. Here are my predictions for oil, silver and copper:

The fair value of NYMEX oil is $82.25/bbl in a range of $79.09/bbl to $85.41/bbl

The fair value of COMEX silver is $24.540/oz in a range of $22.514/oz to $26.566/oz

The fair value of COMEX copper is $3.7827/lb in a range of $3.6730/lb to $3.8924/lb

Here Comes $100+ Oil?

If we look at these two cases one thing is clear, we are stuck with $80/bbl oil with a good chance that we'll close the year above $90. The low range for sleepy bear is just a buck shy of $80 at $79.09 and we could easily approach the mid-$90s for the more bullish case (high range $93.50/bbl). Given the tensions in Iran and Korea, I bet we will see $100+ oil some time in 2011.

Is Silver feeling tired?

Silver has been overvalued with respect to gold for some time plumbing daily lows in its ratio with gold. For yesterday, silver set a new record with gold at $30.75/oz. The gold/silver ratio (Au:Ag) for the record setters is therefore:

Au:Ag = 1432.5/30.75 = 46.59

This ratio is at levels not seen since 2006-early 2007 suggesting silver needs to drop or gold needs to rise to return to the more typical pre-recession range of 50-56. For the bull case, yesterday's silver record fits comfortably in the upper range of expected prices for $1450/oz gold ($31.765/oz top range). For the bear case, silver could drop to the low-$20 range at $22.50. It is doubtful we'll see sub-$20/oz silver anytime soon.

Here is how Au:Ag fares for our two cases:

Raging Bull

Au:Ag 48.76 in a range of 45.65 to 52.32

Sleepy Bear

Au:Ag 55.21 in a range of 50.82 to 59.96

Copper chooses not to sleep

We are in a secular bull market for copper with increasing global demand and near-term restricted supply. The low range for the bull scenario still keeps copper above $4/lb at $4.0015. The low range for the bears is above $3.50/lb which is this Report's trigger point for commodity reflation. In either case, we've got a red metal bull in the pasture going into 2011.

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 600.57, a good drop from yesterday's record level. The 1-month moving average is 514.42. 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 $88.71 (January contract, most active); Gold is down $17.7 to $1391.3 (February contract, most active); Silver is down $0.829 to $28.885 (March contract, most active); Copper is up $0.0350 to $4.0845 (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 1.82 points to 11360.98; the S&P 500 is up 1.06 to 1224.81. Miners are grumpy:

Barrick (ABX) $53.82 down 0.63%
Newmont (NEM) $62.01 down 0.82%
US Gold (UXG) $7.15 down 2.46%
General Moly (Eureka Moly, LLC) (GMO) $5.65 down 1.05%
Thompson Creek (TC) $13.35 up 0.07%
Freeport-McMoRan (FCX) $109.55 down 0.98% (a bellwether mining stock spanning copper, gold & molybdenum)

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

ArcelorMittal (MT) $35.88 up 0.49% - global steel producer
POSCO (PKX) $102.36 down 2.10% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is is down 0.82% to $1,829,069.82 (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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