Thursday, January 13, 2011
The Year of the Rabbit and the Red Metal
It is 5:45 AM. Have a cup, the ole Colonel is on his second. That crazy Thor got me up extra early this morning with a roar of fireworks going off in the hi-bay. He says he's practicing for Chinese New Years - any excuse to make noise and commotion! Happy "Thor's Day"!
The Year of the Rabbit and the Red Metal
Many disruptions to the metals market are unexpected but one thing you can count on is the 15-day celebration of Chinese New Year. It kicks off next week with the full moon and whoop-de-doops until the eve of the new moon or "Lantern day" on February 2nd. Hopefully, things start to return to normal as the Chinese begin their New Year on February 3rd.
Why do we care in Eureka? Let's review the Colonel's two laws of market physics that seem to have worked pretty well for the past several years:
As copper goes, so go the metals & miners, so go the broader markets.
You can't sustain a copper rally without gold's participation
The red metal has proven to be a reliable proxy of global growth since it is used in almost all things new from buildings to consumer electronics. China is the world's largest consumer of copper so when their copper traders bug out for the holidays you can count on a wiggle in the copper market. By Law #1 we can expect some ripples of uncertainty to rattle the metals & mining sector. This is exacerbated this year with persistent concerns that China will engage in more monetary tightening to contain growing inflation. The bankers party too, so everyone will be wondering what will happen when they stumble back to work on the 3rd. Reuter's Silvia Antonioli wrote a good piece on both the New Years and monetary policy effect on copper together with prospects for a stronger dollar:
METALS-Copper softens on concerns about China demand (Silvia Antonioli,Reuters, 01/13/2011 1:40pm GMT)
On a positive note, supply deficit is still expected for copper in 2011 which should put a floor under any price declines. From this morning's action, some of the Chinese traders may have already left their desks and are lighting fireworks with Thor. In the early morning COMEX copper dropped 2% on a day that the dollar is falling too - not a good sign. A second day of successful bond auctions in Europe has pushed the euro up and greenback down. This should bring the "risk trade" back on but I'll bet with copper down this much we'll have a lousy day for the metals & miners...
Yup, a lousy day for the metals & miners
The broader markets are now open and all our favorite mining stocks are in the mineshaft. It's tough to fight the laws of physics.
What about the Colonel's second law? You may remember that we had miners in shaft for months in 2010 before they rallied back in the fall. From mid-May to early September, copper and gold marched in different directions in terms of their 3-month correlation (the copper/gold 3-month correlation was negative from 5/12/2010 to 9/7/2010). Only when gold began to move with copper did we have a sustained rally for the red metal (Law #2) and the metals & miners and the broader markets (Law #1).
The 3-month copper/gold correlation remains positive now but has trended toward negative country since December (e.g., a 1-month decline from a very tight positive correlation of 0.94 to today's 3-month correlation of 0.61). We're still a long way from negative territory but the decline signals a bearish trend for the near term. Copper price decline has proved to be a leading indicator for trouble ahead in the broader markets. The classic case in recent memory was when copper's bottom in December 2008 presaged the S&P 500 bottom in March 2009. Just something to keep our eyes on buckaroos, no need to panic. The Chinese on holiday won't help clear the picture for several weeks. In the meantime, party on with our favorite Norseman Thor!
Daily Market Roundup
Enough talk, let's walk the walk:
Eureka Miner's Index(EMI)
This morning the Eureka Miner's Index(EMI) is above-par at 720.04, down from yesterday's 757.42. We are now above below the 1-month moving average of 684.62 - a bullish sign. The average has, however, peaked at 688.06 January 10th - a bearish indication. Let's see what the next several days bring.
The record high for the EMI is 816.78 set 01/04/2011; 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 re-established an upward trend on Friday, 12/3 which is still 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.
Eureka Outlook Dashboard
4-WD is OFF - Markets are good but there could still be rough roads ahead; The VIX or "fear index" is below 25; bellwether Freeport-McMoRan (FCX) in the low-$120s 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 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 $0.06 in early trading at $91.80 (February contract, most active); Gold is down $0.9 to $1384.9 (February contract, most active); Silver is down $0.060 to $29.485 (March contract, most active); Copper is down $0.0283 to $4.3830 (March contract, most active)
Western Molybdenum Oxide is $16.00; European Molybdenum Oxide is $17.28; LME moly 3-month seller's contract is $17.10, LME cash seller is $16.92
Stock Market Morning Update
The DOW is down 16.99 points to 11,738.45; the S&P 500 is down 0.44 at 1285.52. Miners are unhappy:
Barrick (ABX) $49.17 down 1.66%
Newmont (NEM) $57.12 down 1.16%
US Gold (UXG) $7.50 down 1.19%
General Moly (Eureka Moly, LLC) (GMO) $6.44 down 1.08%
Thompson Creek (TC) $15.3601 down 0.58%
Freeport-McMoRan (FCX) $121.11 down 0.60% (a bellwether mining stock spanning copper, gold & molybdenum)
The Steels are up (a "tell" for General Moly & Thompson Creek):
ArcelorMittal (MT) $36.17 down 0.96% - global steel producer
POSCO (PKX) $108.26 down 2.56% - South Korean integrated steel producer
The Eureka Miner's Grubstake Portfolio is is down 0.93% at $1,914,417.44 (what's this?).
Write Colonel Possum at firstname.lastname@example.org for answers to your questions or to request e-mail updates on the market
Headline photograph by Mariana Titus