"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, January 31, 2011

Oil & Gold Retreat, Copper Strong - Metals & Miners Weekly Roundup

*** BREAKING NEWS *** NYMEX oil and COMEX gold reversed their descent at 09:30 AM ET. Oil has moved up to $92.43/bbl and gold to $1331.5/oz by 11:15 AM PT

Morning Miners!

It is 5:57 AM. Happy Lunar New Years (well almost, Thursday is the new moon)! Have a cup of Monday brew and let's see how we're closing out January before the Year of the Rabbit...

Oil & Gold Retreat, Copper Strong

Both oil & gold got a nice pop Friday on the deteriorating conditions in Egypt but have since retreated in early Monday trading. Dennis Gartman, the "Commodity King" and author of the respected Gartman Letter, told CNBC Business New that the Egypt and the possibility of trouble spreading in the region may have put a bottom in falling gold prices. Here is a link to his Friday interview on both commodities:

Dennis Gartman on Egypt, Oil & Gold (CNBC Business News, 1/28/2011)

NYMEX Oil broke $90 over the weekend but has since fallen back to $89.38/bbl. COMEX Gold dipped all the way to $1,309.10/oz before rallying Friday on the Egypt news. It couldn't quite break the $1,350/oz level and is now trading slightly above the Colonel's January "low ball" price of $1,320/oz at $1,326.7/oz. Reuters Amanda Cooper gives a nice summary of gold's ups and downs over the weekend:

Gold rally slips as safe-haven buying wanes (Amanda Cooper, Reuters, 01/31/2011)

Through all of this, and it is far from over, COMEX copper has remained strong trading at $4.4175/lb this morning. Bloomberg's Glenys Sims gives us an early morning wrap up on the red metal:

Copper Set for Seventh Monthly Gain on Demand Outlook, Inflation (Glenys Sim, Bloomberg News,01/31/2011, 12:40 AM PT)

Thursday is the first day of the Chinese New Year and we should see what their metal traders will be buying as they return from holiday. The Chinese New Year, further development of events in Egypt and Friday's monthly labor report should be enough news to keep our metals molten. Stay tuned.

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 471.91, up from Friday's 447.91. We are below the 1-month moving average of 632.27 and the the EMI is now trending down from the high set on January 4th.

The 2011 record high for the EMI is now 816.78 set 01/04/2011; the 52-week low was set 6/7/2010 at 50.7. An EMI of 100 is the boundary between good lands and bad lands for the metals & miners relevant to Eureka County.

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. With supply and demand fundamentals driving the commodity space, diminishing correlations between key commodities are less alarming but trends should still be carefully monitored.

Here are the latest correlations given this morning's NYMEX/COMEX trading:

Oil/Au correlation +0.0.6964 (1-month) +0.4173 (3-month)
Cu/Au correlation +0.4981 (1-month) +0.0844 (3-month)
Cu/Oil correlation +0.5874 (1-month) +0.8662 (3-month)

Here are the numbers from the last roundup (01/24/2011):

Oil/Au correlation +0.4768 (1-month) +0.5857 (3-month)
Cu/Au correlation +0.3597 (1-month) +0.4024 (3-month)
Cu/Oil correlation +0.3542 (1-month) +0.9193 (3-month)

All these correlations remain positive which is a typically a bullish condition for the metals & miners but some bearish trends continue. The 3-month correlation of copper & gold continues to weaken threatening an inversion (i.e negative correlation) and copper exhibits a very over-valued state with respect to gold (5.3-standard deviations above the new January model "fair vale" line). This updated chart of copper versus oil shows just how out-of-whack these two metal prices are tracking (yellow line most recent data - a larger and more readable chart apppears near the bottom of this blog page):

Though less severe, oil and gold are showing divergence also in their 3-month numbers. Oil is presently overvalued with respect to gold by 4.5-standard deviations. The 3-month correlations of copper & oil remains have fallen below 0.9 suggesting copper and oil price correlation is starting to weaken. Copper is presently overvalued with respect to oil by 3.3-standard deviations.

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 trend toward the "-,+" quadrant for oil has reversed which is bullish (white arrow), but the decline in both copper and oil 3-month correlations with gold is bearish (i.e. arrow points down).

Gold/Oil, Oil/Copper & Gold/Copper Ratios

The Report has been tracking the stability of the gold/oil, oil/copper & gold/copper ratios. Although they ended last year rock solid (<3% variation, 1-standard deviation/mean) the ratios continue to diverge. This is what prompted my January 14th comment to Adella Harding, Elko Daily Free Press, "The recent divergence of our lustrous friend [gold] from copper and oil...may signal a near-term correction for the overall metals and mining sector.".

Here is a plot of the variation for both ratios as well as the copper/oil ratio (a larger and more readable chart is given at the bottom of the blog page):

Once the ratios exceed 3% error, they become less useful in predicting the price moves of one commodity with respect to another in the ratio pair.

For the past 3-months we have these statistics given this mornings' numbers:

Au/Oil ratio

mean 15.70 bbl/oz
variation > 3.0% limit at 3.24% (1-standard deviation/mean)

Oil/Copper ratio

mean 21.29 lbs/bbl
variation > 3.0% limit at 3.02% (1-standard deviation/mean)

Au/Copper ratio

mean 334.53 lbs/oz
variation > 3.0% limit at 5.80% (1-standard deviation/mean)

Weekly Molybdenum Roundup

Spot prices for molybdenum oxide remain in $17/lb territory out West and in Europe. Moly futures are in a mild contango between spot prices and the London Metal Exchange (LME) 3-month and 15-month contracts (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 $17.69/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.

A faithful reader sent this excellent link on molybdenum price outlook. CPM Group is estimates an average price of $21.75/lb up slightly from my mid-range target of $20.21/lb:

MOLYBDENUM FOCUS - Molybdenum to average $21.75/lb in 2011 - CPM Group (Mark Shaw, FastMarkets, 1/21/2011)

Here is a detailed pricing summary for last week:

Western Moly Oxide $17.00/lb (the price tracked by Base Metals on the General Moly Website)

Moly Oxide, Europe (Mo Drummed Molydbic Oxide EU) $17.50/lb (the price reported in the Metals Bulletin)

LME Futures Contracts

LME cash seller is at $37300/metric ton $17.51/lb

3-Month (Buyer) $37,000/metric ton $16.78/lb
3-Month (Seller) $39,000/metric ton $17.69/lb

15-Month (Buyer) $38,200/metric ton $17.32/lb
15-Month (Seller) $40200/metric ton $18.23/lb

Here is a chart of the LME 3-month contract (seller) from the February launch to the present:

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) is below its 50-day moving average of 111.35 (1/24/11) but still well above its 200-day average of $83.07 (our new warning level, 01/05 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 $0.04 in early trading at $89.38 (March contract, most active); Gold is down $15.00 to $1326.7 (April contract, most active); Silver is down $0.074 to $27.845 (March contract, most active); Copper is up $0.0445 to $4.4175 (March contract, most active)

Western Molybdenum Oxide is $17.00; European Molybdenum Oxide is $17.50; LME moly 3-month seller's contract is $17.69, LME cash seller is $17.51

Stock Market Morning Update

The DOW is up 4.17 points to 11,827.87; the S&P 500 is up 2.79 to 1279.13. Miners are up except for US Gold:

Barrick (ABX) $47.37 up 0.15%
Newmont (NEM) $55.22 up 0.40%
US Gold (UXG) $6.56 down 0.12%
General Moly (Eureka Moly, LLC) (GMO) $5.07 up 0.20%
Thompson Creek (TC) $13.49 up 0.45%
Freeport-McMoRan (FCX) $108.48 up 2.18% (a bellwether mining stock spanning copper, gold & molybdenum)

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

ArcelorMittal (MT) $36.55 up 1.30% - global steel producer
POSCO (PKX) $101.09 up 0.59% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is is up 0.62% at $1,771,734.25 (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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