"The history of Eureka lies in its future." - Lambert Molinelli, 1878

DISCLOSURE

The author/editor of the Eureka Miner owns common shares of local mining stocks, General Moly (GMO), McEwen Ming (MUX) 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, January 10, 2011

Are We in a Correction? Metals & Miners Weekly Roundup


Morning Miners!

It is 5:52AM. Grab a cup of Monday joe and let's see what's in the crystal ball for this first month of the new year...

Metals & Miners in correction?

Nobody can say we didn't start out 2011 in fine fashion. We logged a new record for COMEX copper and silver last Monday and new highs were set for the Eureka Miner's Index (EMI) Monday and Tuesday. We must have caught a sharp rock in our tire since with the precious metals losing air followed by a drop in both copper prices and the EMI.

Some of the old bugaboos from last year have showed back up on the porch again; a return of European sovereign debt worries and jitters about the rising inflation rate in China. In a different vein, a rosier view of our domestic recovery initially helped push down gold prices but this optimism was damped by a less than stellar jobs report Friday. This news bounced gold up then down, so it goes. Today the EMI has fallen its fourth consecutive market day and it's reasonable to ask if the entire metals & mining sector has started a corrective phase. Let's explore the pieces and see if we can find an answer.

Near term gold price

Not long ago we seemed to be setting new records on a regular basis for our favorite metals. 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 $31.275/oz 08:15:00 ET 01/03/2011, March contract most active
COMEX Copper $4.4980/lb 05:45:00 ET 01/03/2011, March contract most active

Gold tried very hard to return to its December Pearl Harbor high but could never quite get back its mojo. In contrast, silver and copper scored records right into the new year. Over the weekend I updated my models to see if there were any clues for where we may be headed next.

Let's start by getting a handle on gold prices. The International Business Times carried a short and very technical analysis on gold price expectations for the near term:

Gold Technical Precious Metals (2011-01-10) (International Business Times, Mineweb, 01/10/2011)

According to this article gold finds itself in a trading range with key support at $1298.0/oz and key resistance at 1413.00/oz. Within this range the ole Colonel will choose a nominal gold price of $1380/oz gold for January and a "low ball" price of $1320/oz to evaluate the expected price ranges of oil, copper and silver.

The Colonel's Models for January

Another piece of the golden puzzle is offered by Dennis Gartmen, "Commodity King" and author of the Gartman Letter. As relayed by Kitco News this morning, Gartman believes gold prices are rising higher in euro-terms versus dollar-terms:

"[Gartman] says spot gold is trading around €1062, which is 1%-2% off its recent highs, while gold valued in U.S. dollar terms is 2%-3% below its highs. 'Indeed, looking at the charts of each, one could say that since late October the trend of gold in dollar terms is actually modestly lower while one could only say that the trend of gold in euro terms is clearly upward,' Gartman says. He has been an advocate of owning gold in non-U.S. dollar terms. (Kitco News Nugget, 01/10/2010)

You may remember that I look at commodities with respect to a reference commodity (e.g. oil or gold) to mitigate currency influences. For example, you may ask yourself how many pounds of copper can you buy for an ounce of gold instead of for one U.S. dollar or one euro. This often gives us a clearer picture for the changing "value" of a commodity in relation to something that is regarded to have "intrinsic value" such as gold as opposed to the often mercurial value of a fiat currency. In this light, I have been saying that copper appears dramatically "overvalued" with respect to gold. We can see this in a graph of COMEX copper prices plotted against gold prices:


The above chart is based on the last 3-months of copper and gold futures data (most active front month contract). 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 (1-month), dark blue is older data, light blue is a 1-month moving average (a larger and more readable chart is given near the bottom of the blog page). The most recent data for copper (yellow line) is flying above the upper bound suggesting the overvalued condition. Similar models of copper versus oil, silver versus gold and oil versus gold are also given below.

Near term oil, silver & copper prices

Given our nominal and "low ball" gold price target and updated models we can predict the the fair value and expected price range for oil, silver and copper.

Nominal price for COMEX gold of $1380/oz

The fair value of NYMEX Oil is $86.12/bbl in a range of $82.19/bbl to $90.05/bbl
The fair value of COMEX silver is $27.261 in a range of $24.513/oz to $30.009/oz
The fair value of COMEX copper is $3.9869 in a range of $3.7132/oz to $4.2607/oz

"Low ball" price for COMEX gold of $1320/oz

The fair value of NYMEX Oil is $79.82/bbl in a range of $75.90/bbl to $83.78/bbl
The fair value of COMEX silver is $22.383 in a range of $19.635/oz to $25.131/oz
The fair value of COMEX copper is $3.6572 in a range of $3.3835/oz to $3.9310/oz

Several things stand out from this analysis. The first is that, lacking any major geo-political event, $100/bbl and perhaps even $90/bbl oil is off the table for the near term. Except for the lower limit of the low ball gold price, silver price will probably remain above $20/oz. More ominously, we could see copper slip below $4/lb for even the nominal case. This morning COMEX copper is trading at 4.2870/lb which is just slightly above the upper nominal range for the red metal. Today's gold price is near my January nominal at $1373.1/oz. In summary it looks like the metal's are in a corrective phase after a very strong run in the latter part of 2010.

Weekly Molybdenum Roundup



Spot prices for molybdenum oxide remain in $16/lb territory in the West and Europe. Moly futures indicate a mild contango between spot prices and the London Metal Exchange (LME) 3-month and 15-month seller contracts both of which are now above $17/lb (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; backwardation is the opposite of contango).

The 3-month seller at $17.10/lb is comfortably above the Colonel's mid-range moly price target for 2010 of $15.71/lb but below my target of $20.21/lb for 2011. The Report will give moly prices a "yellow-green" light on the Eureka Outlook Dashboard for now because I do believe we could see much higher prices this year.

Here is a detailed pricing summary for last week:

Western Moly Oxide $16.00/lb (the price tracked by Base Metals on the General Moly Website)

Moly Oxide, Europe (Mo Drummed Molydbic Oxide EU) $16.70/lb (the price reported in the Metals Bulletin)

LME Futures Contracts

LME cash seller is at $37000/metric ton $17.78/lb

3-Month (Buyer) $37,000/metric ton $16.78/lb
3-Month (Seller) $37,700/metric ton $17.10/lb

15-Month (Buyer) $37,825/metric ton $17.16/lb
15-Month (Seller) $39,075/metric ton $17.72/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.


This morning the Eureka Miner's Index(EMI) is above-par at 586.12, down from Friday's 649.34. We are now 4-days below the 1-month moving average of 688.06, a potentially bearish sign. Similar to the metals we examined above, it appears that the miners are also entering a corrective phase.

The 2011 record high for the EMI is now 796.00 set 01/03/2011; the 52-week 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 re-established an upward trend on Friday, 12/3 but is now again under pressure.

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 +0.5472 (1-month) +0.7730 (3-month)
Cu/Au correlation +0.4571 (1-month) +0.6291 (3-month)
Cu/Oil correlation +0.5936 (1-month) +0.9125 (3-month)

Here are the numbers from the last Monday's roundup (01/03/2011):

Oil/Au correlation +0.3851 (1-month) +0.8179 (3-month)
Cu/Au correlation +0.2525 (1-month) +0.7293 (3-month)
Cu/Oil correlation +0.7668 (1-month) +0.9257 (3-month)

All these correlations remain positive which is a typically a bullish condition for the metals & miners but some bearish trends are still present. The correlation of copper & gold has strengthened a bit and copper still shows an over-valued state with respect to gold (2.5-standard deviations above the new January model "fair vale" line). Though less severe, oil and gold are also showing some divergence. Oil is presently overvalued with respect to gold by 1.5-standard deviations. The 3-month correlations of copper & oil remains above 0.9 suggesting copper and oil prices continue to move together although the 1-month correlation has dropped below 0.6.

One way to visualize these correlations over time is to plot the "near-term" 3-month versus the "short-term" 1-month correlations (aka "rho") as shown below in a graph of oil versus gold and copper versus gold. The blue line indicates the correlation trajectory since October 1st; the magenta line is recent data since December 1st (ref: China to the Rescue?):



In the case of oil versus gold, we start out on 10/1/10 in the "+,-" or "yellow" quadrant and move upward until both are positively correlated (i.e. in the "+,+" or "green" quadrant). Copper correlated positively faster than oil and has been in the green quadrant for this entire period. Correlation data in this region is typically considered bullish. The recent trend toward the "-,+" quadrant for both oil & copper has reversed which is bullish (white arrow) but the down trend in the 3-month correlation is somewhat bearish.

Gold/Oil & Oil/Copper Ratios

The Report has been tracking the stability of the gold/oil and oil/copper ratios. Although they have been rock solid (<3% variation) the oil/gold ratio is starting to diverge. Oil/copper remains on track.

For the past 3-months we have these statistics:

Au/Oil ratio

mean 16.00 bbl/oz
variation > 3.0% limit at 3.04% (1-standard deviation/mean)

Oil/Copper ratio

mean 21.52 lbs/bbl
variation 2.00% (1-standard deviation/mean)

Daily Market Roundup

Enough talk, let's walk the walk:

Eureka Outlook Dashboard

4-WD is OFF - Markets are stable but caution is in the air; 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 YELLOWE 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 $1.50 in early trading at $89.53 (February contract, most active); Gold is up $4.2 to $1373.1 (February contract, most active); Silver is up $0.359 to $29.030 (March contract, most active); Copper is up $0.0045 to $4.2870 (March contract, most active)

Western Molybdenum Oxide is $16.00; European Molybdenum Oxide is $16.70; LME moly 3-month seller's contract is $17.10, LME cash seller is $16.78

Stock Market Morning Update

The DOW is down 89.96 points to 11,587.80; the S&P 500 is down 8.06 to 1263.44. Miners are mixed:

Barrick (ABX) $49.16 up 0.12%
Newmont (NEM) $56.94 up 0.09%
US Gold (UXG) $7.01 up 0.03%
General Moly (Eureka Moly, LLC) (GMO) $6.00 down 1.32%
Thompson Creek (TC) $14.26 down 1.66%
Freeport-McMoRan (FCX) $116.02 down 1.24% (a bellwether mining stock spanning copper, gold & molybdenum)

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

ArcelorMittal (MT) $34.47 down 1.57% - global steel producer
POSCO (PKX) $107.85 down 0.69% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is is down 0.56% at $1,845,822.34 (what's this?).

Cheers,

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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