"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, February 7, 2011

Copper & Gold Flip-Flop - Metals & Miners Weekly Roundup


Morning Miners!

It is 5:53 AM. Super Bowl is over, pardner. Have a cup of Monday cold-start and let's get to work...

Copper & Gold Flip-Flop

We're stating this week with yet another COMEX copper record pegging $4.6375/lb in the early hours. COMEX gold is pretty much where we left it at $1351.3/oz and silver has stepped up slightly to 29.190/oz.

The beginning of 2011 continues to be period of rising copper, falling-to-sideways gold and resilient silver. Silver, although down with gold, has some of the same attractiveness as the base metals due to growing industrial applications (e.g., high energy density batteries).

The closely watched gold/silver ratio is evidence of silver's resilience. The ratio is compressing a bit more today to 46.3 from Friday's 46.4; it has been below 50 since December 1st - a sign of weak gold, stronger silver. By comparison the gold/silver ratio was in a range of 50-56 before the collapse of Lehman Brothers and at the height of the financial crisis the ratio spiked above the 80s.

Copper is now negatively correlated with gold over the last 3-months given the recent inverse relation of copper and gold prices (see below). This bearish flip-flop and a very low silver/gold ratio are not sustainable patterns in my view. It is certainly not a good environment for mining stocks which remain in a corrective phase while the broader markets soar. The mining companies do best as a sector when gold and the metals all move together which was the condition during the impressive mining rally at the end of last year. LOGIC Advisor's Bill O'Neill commented last week, "Gold is a psychological market, and right now the psychology is neutral at best."

Thankfully there has has been some pickup in the Eureka Miner's Index (EMI) which has climbed above its 1-month moving average for the second consecutive day (below) and it looks like a good morning for the miners. A copper/gold inversion of short duration would be supportive of future EMI improvement.

Let's update our record books. 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 $4.6375/lb 06:15:00 ET 02/04/2011, March contract most active

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 607.25, slightly up from from Friday's 605.31 and breaking above the 1-month moving average of 587.38. Although a bulllish sign, the EMI continues to trend 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.

Daily Oil Watch

Last week we identified North Sea Brent crude oil as a good barometer for the developing crisis in Egypt. It is above $100/bbl with a large spread from the North American benchmark, Western Texas Intermediate or "Texas light sweet crude", traded on the NYMEX (see note 1). The Report normally follows the latter but will track both until things settle out in the Middle East.

Here are the most active March contracts as of this morning:

NYMEX light sweet crude $88.79
ICE North Sea Brent crude $100.33
Spread (ICE- NYMEX) = $11.51 (Friday $10.54)

Here are the June contracts with a narrower spread:

NYMEX light sweet crude $95.73
ICE North Sea Brent crude $101.59
Spread (ICE- NYMEX) = $5.86 (Friday $5.80)

Both NYMEX & Brent crude prices are decreasing with a reduction in tensions in Egypt but the spreads are still in favor of higher oil prices for the summer. I'll stick with my December prediction that we will see NYMEX $100/bbl oil before the Fourth of July.

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 +0.5239 (1-month) +0.2739 (3-month)
Cu/Au correlation -0.0465 (1-month) -0.1026 (3-month)
Cu/Oil correlation +0.4785 (1-month) +0.8548 (3-month)

Here are the numbers from the last roundup (01/31/2011):

Oil/Au correlation +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)

All these correlations remain positive except copper and gold which have started a bearish "inversion" with negative one- and three-month values. Copper continues to exhibit an over-valued state with respect to gold (2.2-standard deviations above the new February model "fair value" line). The following updated chart of copper versus gold shows a much flatter slope and wider separation between the upper and lower range than January's model (ranges shown by aqua lines, the yellow line shows the most recent data, the blue line is a 1-month moving average and the dark blue line is older data - a larger and more readable chart appears near the bottom of this blog page):

Oil and gold are showing more weakening in their correlations although oil is presently closer to fair value with respect to gold by 0.9-standard deviations. The 3-month correlations of copper & oil remains remain below 0.9 suggesting copper and oil price correlation have weakened but are still above 0.8. Copper is presently overvalued with respect to oil by 3.5-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 longer. Correlation data in this region is typically considered bullish. The trend toward the "-,+" quadrant for oil is a bearish trend; copper moving into the "-.-" region with respect to gold is very bearish..

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 15.61 bbl/oz
variation > 3.0% limit at 3.52% (1-standard deviation/mean)

Oil/Copper ratio

mean 21.11 lbs/bbl
variation > 3.0% limit at 3.41% (1-standard deviation/mean)

Au/Copper ratio

mean 329.8 lbs/oz
variation > 3.0% limit at 6.45% (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.

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) $17.68/lb (the price reported in the Metals Bulletin)

LME Futures Contracts

LME cash seller is at $38600/metric ton $17.51/lb

3-Month (Buyer) $38,600/metric ton $17.51/lb
3-Month (Seller) $39,000/metric ton $17.69/lb

15-Month (Buyer) $38,250/metric ton $17.35/lb
15-Month (Seller) $40250/metric ton $18.26/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 ON - The metals & miners have hit a rough patch; The VIX or "fear index" is below 25; bellwether Freeport-McMoRan (FCX) is just above its 50-day moving average and still well above its 200-day average of $43.06 (our new warning level, 02/02 update after the FCX 2:1 stock split); 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, R&R Partners parts ways with Nevada Mining Association

Otherwise, all lights are green on the Eureka Outlook Dashboard (upper right, what's this?)

Commodity Market Morning Update

NYMEX/COMEX: Oil is down $0.24 in early trading at $88.79 (March contract, most active); Gold is up $2.3 to $1351.3 (April contract, most active); Silver is up $0.131 to $29.190 (March contract, most active); Copper is up $0.0350 to $4.6145 (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 49.80 points to 12,141.95; the S&P 500 is up 5.40 to 1316.27. Miners are mixed:

Barrick (ABX) $48.08 down 0.06%
Newmont (NEM) $57.53 up 0.98%
US Gold (UXG) $6.99 up 1.01%
General Moly (Eureka Moly, LLC) (GMO) $5.46 down 0.44%
Thompson Creek (TC) $14.33 up 0.63%
Freeport-McMoRan (FCX) $57.42 up 1.16% (a bellwether mining stock spanning copper, gold & molybdenum)

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

ArcelorMittal (MT) $36.59 up 1.25% - global steel producer
POSCO (PKX) $107.16 up 1.01% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is is up 0.52% at $1,760,100.38 (what's this?).


Colonel Possum

Note 1 - West Texas intermediate (WTI), also known as Texas light sweet, is a type of crude oil used as a benchmark in oil pricing and is the underlying commodity of New York Mercantile Exchange's (NYMEX) oil futures contracts. The price of WTI is often referenced in North American news reports on oil prices, alongside the price of North Sea Brent crude (Wiki).

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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