"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.

Tuesday, January 18, 2011

What's Up with Gold? Metals & Miners Weekly Roundup

Morning Miners!

It is 5:36 AM. Have a hot cup of Tuesday joe. Sweet Ruby T would sure love to haul in some new records for the metal complex, I think December got her thinking January would be a busy month. Hang tight hon, the orders may be coming back....

What's Up with Gold?

Mining Editor of the Elko Daily Free Press Adella Harding carried some of my latest thinking on gold prices last Friday:

Gold prices end week down (ADELLA HARDING Mining Editor Elko Daily Free Press, Friday, January 14, 2011 5:18 pm)

Let's expand on those thoughts a little for today's Weekly Roundup. Adella started by quoting my reaction to Friday's ups and downs:

"It is natural to wonder what's up on a day when gold is down $30 and copper and oil are up, when gold is down more than 2 percent and the broader commodities index has barely budged..."

I had just watched commodity trader Bill O'Neill on CNBC Business News suggest that investors seriously look at oil, copper and food this year and continued,

"Oil and copper have been reliable proxies for global growth. Although copper has had quite a run up, almost breaking $4.50 a pound, there may be more room to go as a fairly broad consensus expects the red metal will face a supply deficit on rising world demand in 2011..."

Bloomberg's Shanghai correspondent Helen Sun gives us a nice update on the perceived copper deficit this morning:

Copper Advances on Expected Supply Shortfall; Aluminum Climbs (Helen Sun in Shanghai, Bloomberg News, Jan 18, 2011 12:25 AM PT Tuesday)

Adella went on to quote my thoughts on oil,

"Oil is above $90 a barrel gain and many (including myself) believe there is a good chance that we see a spike to $100 a barrel by mid-year..."

and finally gold,

"So what about gold? I believe that copper and oil cannot continue to rise on falling gold. The recent divergence of our lustrous friend from copper and oil and the uncharacteristic resilience of silver compared to gold's weakness may signal a near-term correction for the overall metals and mining sector.."

I ended my input to the Elko Daily Free Press by sticking with my earlier prediction that gold will break $1,570 an ounce before July 4. Let's fill in a few more details given today's market moves...

Gold, Silver, Copper Records

December was a busy month for setting new highs for our favorite metals right up to the first market day of the new year. 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

In the last roundup we identified a trading range for gold with key support at $1298.0/oz and key resistance at $1413.00/oz. Within this range, I picked 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.

This morning it looks like COMEX gold is trying very hard to make it back to my nominal price trading now at $1372.6/oz after hitting a low Friday of $1355/oz. Silver and copper are bouncing back too at $28.875/oz and 4.4255/lb respectively from last week's lows of $28.050/oz and $4.2540/lb. Not bad, should be a good day for the miners. The broader markets are now open and the miners for the most part are trying to haul away a little of last week's overburden...

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 718.81, up slightly from Friday's 717.84. We are just staying above the 1-month moving average of 689.49 - although tenuous, a bullish sign. The upward trend for the EMI is still under pressure.

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 and shed some light on my "divergence" comment.

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

Oil/Au correlation +0.4767 (1-month) +0.7377 (3-month)
Cu/Au correlation +0.3588 (1-month) +0.5664 (3-month)
Cu/Oil correlation +0.5206 (1-month) +0.9195 (3-month)

Here are the numbers from the last Monday's roundup (01/10/2011):

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)

All these correlations remain positive which is a typically a bullish condition for the metals & miners but some bearish trends continue. The correlation of copper & gold continues to weaken showing an over-valued state with respect to gold (3.5-standard deviations above the new January model "fair vale" line). Though less severe, oil and gold are also showing divergence. Oil is presently overvalued with respect to gold by 2.75-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 is bearish (white arrow).

Gold/Oil & Oil/Copper Ratios

The Report has been tracking the stability of the gold/oil and oil/copper ratios. Although they ended last year rock solid (<3% variation, 1-standard deviation/mean) the ratios are starting to diverge. This is what prompted my quote to Adella, "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 15.88 bbl/oz
variation > 3.0% limit at 3.06% (1-standard deviation/mean)

Oil/Copper ratio

mean 21.45 lbs/bbl
variation 2.54% (1-standard deviation/mean)

Weekly Molybdenum Roundup

Spot prices for molybdenum oxide are in $16/lb territory out West but broke $17/lb in Europe. Moly futures indicate a backwardation between European spot prices and the London Metal Exchange (LME) 3-month contract possibly signaling a pickup in near term demand overseas. Western and European spot prices continue a mild contango with the 15-month seller 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 $17.10/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) $17.32/lb (the price reported in the Metals Bulletin)

LME Futures Contracts

LME cash seller is at $37300/metric ton $16.92/lb

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

15-Month (Buyer) $38,050/metric ton $17.26/lb
15-Month (Seller) $39,050/metric ton $17.71/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) in the high-$110s above its 200-day average of $83.07 (our new warning level, 1/05 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 ORANGE light is turned on our Fuel Gauge with oil above $90

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 down $0.78 in early trading at $90.76 (February contract, most active); Gold is up $12.1 to $1372.6 (February contract, most active); Silver is up $0.555 to $28.875 (March contract, most active); Copper is up $0.0135 to $4.4255 (March contract, most active)

Western Molybdenum Oxide is $16.00; European Molybdenum Oxide is $17.32; LME moly 3-month seller's contract is $17.10, LME cash seller is $16.92

Stock Market Morning Update

The DOW is up 26.07 points to 11,813.45; the S&P 500 is down 2.26 to 1290.98. Miners up except for General Moly:

Barrick (ABX) $48.07 up 2.10%
Newmont (NEM) $56.42 up 1.26%
US Gold (UXG) $7.41 up 2.21%
General Moly (Eureka Moly, LLC) (GMO) $6.08 down 0.24%
Thompson Creek (TC) $15.21 up 0.53%
Freeport-McMoRan (FCX) $119.25 up 0.76% (a bellwether mining stock spanning copper, gold & molybdenum)

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

ArcelorMittal (MT) $36.39 up 0.30% - global steel producer
POSCO (PKX) $105.34 down 0.51% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is is up 0.96% at $1,886,784.94 (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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