"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 28, 2011

Gold's Dramatic Drop in Value - Metals & Miners Weekly Roundup

Morning Miners!

It is 5:49 AM. Have a hot cup of get-back-to-work and let's do just that - things may be looking up (a bit)...

Oil & Metals Outlook

Oil producers Saudi Arabia and Kuwait appear ready to make up for crude supplies lost due to the unrest in Libya, stabilizing oil prices for the time being. COMEX copper continued its Friday rally to break $4.5/lb and then fell back a thin flat washer to $4.4875/lb. Gold and silver couldn't decide whether to be up or down as shown in these charts of morning trading in the London spot market:

The closely watched gold/silver ratio is at an exceptionally low 42.2 with COMEX gold trading at $1409.2/oz and silver, at $33.360/oz. The Report often reminds the reader that 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. The ratio is presently at decade lows.

No records yet today - here is the record book for our big three metals together with NYMEX and ICE Brent crude oil:

COMEX Gold $1432.5/oz 08:25:00 ET 12/7/2010, February contract most active
COMEX Silver $34.330/oz 20:00:00 ET 02/21/2011, March contract most active
COMEX Copper $4.6375/lb 06:15:00 ET 02/04/2011, March contract most active
NYMEX WTI Crude $103.41/bbl 02:45:00 ET, 02/24/2011, April contract most active
ICE Brent crude $119.79/bbl 02:45:00 ET 02/24/2011, April contract most active

Gold's dramatic drop in value

The following may be useful to understand gold’s dramatic drop in value relative to oil, copper and silver over the last three months (Note: This comparison uses the NYMEX/COMEX mid-day prices for oil, gold, copper & silver for November 26th, 2010 and February 25th, 2011).

Around Thanksgiving time last year oil was in the low $80s per barrel and copper traded for less than $4 per pound. One could buy about 22 pounds of COMEX copper with one barrel of NYMEX light sweet crude.

In early February, copper set a new record trading above $4.6 per pound and last week we saw NYMEX oil break $100 per barrel. Surprisingly, one barrel of oil still fetches 22 pounds of copper. Both have retreated from their highs but oil remains in the high-$90s and copper has bounced to back to about $4.4/lb.

Although gold has risen again above $1400 per ounce it has lost considerable value with respect to both oil and copper over the last three months. Turkey time saw gold in the $1360s and one ounce of glitter bought a bit more than of 16 barrels of oil and 360 pounds of copper. Now an ounce of gold is only worth 14.5 barrels of oil and 320 pounds of the red metal.

Gold’s drop in value with respect to silver is also startling. For the same time period, an ounce of gold in mid-November could buy 51 ounces of silver; now only 43.
(CP Analytics, 2/25/2011)

Note: This morning's numbers don't change this 2/25 comparison by very much:

oil:copper 21.75 lbs/bbl
gold:oil 14.45 bbl/oz
gold:copper 314.2 lbs/oz
gold:silver 42.24 oz/oz

3-month statistics for these ratios are given later in this blog.

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, more readable chart can be found near the bottom of the blog page):

This morning the Eureka Miner's Index(EMI) is above-par at 532.34, up from from Friday's close at 487.86 and just below the 1-month moving average of 547.97. The EMI continues to be down from the high set on January 4th but a trend reversal may again be in the works with a new 2011 low set February 24th.

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 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

On February 1st we identified North Sea Brent crude oil as a good barometer for the developing crisis in the Middle East and North Africa. It is still above $100/bbl with a large but narrowing 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 region.

Here are the most active front-month contracts as of this morning:

NYMEX light sweet crude $97.53
ICE North Sea Brent crude $112.12
Spread (ICE- NYMEX) = $14.59 (Last Friday $14.33)

Here are the June contracts with a narrower spread:

NYMEX light sweet crude $99.91
ICE North Sea Brent crude $111.72
Spread (ICE- NYMEX) = $11.81 (Last Friday $11.65)

Although prices are off their crisis highs, we still have $100+ Brent in June favoring higher oil prices for the summer. My December prediction that we will see NYMEX $100/bbl oil before the Fourth of July came true on February 23rd.

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 again, 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 +0.6258 (1-month) +0.3941 (3-month)
Cu/Au correlation -0.3356 (1-month) -0.3349 (3-month)
Cu/Oil correlation -0.6059 (1-month) +0.1798 (3-month)

Here are the numbers from the last roundup (2/12/2011):

Oil/Au correlation +0.1642 (1-month) +0.2414 (3-month)
Cu/Au correlation 0.4035 (1-month) -0.2320 (3-month)
Cu/Oil correlation -0.0654 (1-month) +0.5060 (3-month)

We now have as many negative as positive correlations. Oil and gold have strengthened in a positive direction; copper and gold have weakened into a solid inversion (i.e. both one-month & three-month value correlations are negative). Copper and oil are mixed. Typically this a bullish trend for oil and a bearish development for copper - the metals & miners tend to do best when all correlations are positive. However, gold's recent loss of value with respect to key commodities (see above) clouds this bull/bear argument. Stay tuned.

According to my February models: oil is presently overvalued with respect to gold by +3.02-standard deviations and copper is overvalued by 1.43-standard deviations. Copper is presently under-valued with respect to oil by -2.62-standard deviations. Copper is presently undervalued with respect to oil by a -2.62-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 more recent data (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 last fall and has was initially in the green quadrant longer. Correlation data in this region is typically considered bullish. After a brief venture into the "-,+" quadrant, the return of oil vs gold to the "+,+" side is bullish; the movement of copper vs gold into the "-,-" inversion region is a bearish development.

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 diverged and now appear to be stabilizing. The period of divergence 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, more readable chart can be found near 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 the another in the ratio pair. However, the gold/oil ratio is nearly 3% again.

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

Gold:Oil ratio

mean 15.37 bbl/oz
variation > 3.0% limit at 3.11% (1-standard deviation/mean)

Oil:Copper ratio

mean 20.76 lbs/bbl
variation > 3.0% limit at 4.91% (1-standard deviation/mean)

Gold:Copper ratio

mean 319.8 lbs/oz
variation > 3.0% limit at 5.33% (1-standard deviation/mean)

Weekly Molybdenum Roundup

Spot prices for molybdenum oxide remain in $17/lb territory out West and in Europe. Euro moly spot is now in backwardation with both 3-month and 15-month London Metal Exchange (LME) seller contracts. Western Moly is in a very weak contango with both 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).

Last Wednesday's report suggested a drop in London Metal Exchange molybdenum futures prices may be a harbinger for lower prices in the moly oxide spot markets in the short term. Here is an interesting article from Platts Resources that backs up that concern:

Moly oxide slides on slow end-user buying and trader liquidations (Platts Metals, 2/24/2011)

The 3-month seller at $17.06/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. There is an excellent analysis of the supply/demand argument for $20+/lb moly provided by General Moly's Seth Foreman in the General Moly Update.

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) $17.75/lb (the price reported in the Metals Bulletin)

LME Futures Contracts

LME cash seller is at $39,990/metric ton $16.78/lb

3-Month (Buyer) $36,600/metric ton $16.60/lb
3-Month (Seller) $37,600/metric ton $17.06/lb

15-Month (Buyer) $37,775/metric ton $17.13/lb
15-Month (Seller) $38,775/metric ton $17.59/lb

Last Tuesday was the one-year anniversary of the molybdenum futures market. Here is a chart of the LME 3-month contract (seller) from the February launch to the present:

Enough talk, let's walk the walk:

Eureka Outlook Dashboard

4-WD is ON - The metals & miners are still in a rough patch; The VIX or "fear index" is below 25; bellwether Freeport-McMoRan (FCX) is just below its 100-day moving average and safely 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 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, 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 $0.35 in early trading at $97.53 (April contract, most active); Gold is down $0.10 to $1409.2 (April contract, most active); Silver is up $0.437 to $33.360 (May contract, most active); Copper is up $0.0295 to $4.4845 (May contract, most active)

Western Molybdenum Oxide is $17.00; European Molybdenum Oxide is $17.75; LME moly 3-month seller's contract is $17.06, LME cash seller is $16.78

Stock Market Morning Update

The DOW is up 72.24 points to 12,202.69; the S&P 500 is up 6.48 to 1326.36. Miners are mixed:

Barrick (ABX) $52.05 up 0.33%
Newmont (NEM) $54.20 down 0.48%
US Gold (UXG) $7.34 up 1.66%
General Moly (Eureka Moly, LLC) (GMO) $5.42 up 2.46%
Thompson Creek (TC) $13.60 up 0.07%
Freeport-McMoRan (FCX) $53.21 up 1.45% (a bellwether mining stock spanning copper, gold & molybdenum)

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

ArcelorMittal (MT) $36.85 up 2.36% - global steel producer
POSCO (PKX) $102.89 up 0.62% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is is up 1.05% at $1,801,353.97 (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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