Do Ill Winds Blow for Metals & Miners?

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Morning Miners!

It is 5:51 AM. Have a cup of Thunder Joe and let's see what has our favorite Norseman chuckling. Hmmm, just as I expected - Thor senses approaching storm clouds and we're not talking about weather...

Ill Winds Blow for the Metals & Miners

After a spectacular open, 2011 has proved to be disappointing for gold and our favorite mining companies but base metals have rallied along with the broader markets. Now that the Chinese are back from holidays the metals are starting to falter too. Inflation concerns in not only China but the emerging world are building which has put a damper on rising metal prices. The morning headline from the London Metal Exchange puts the worry simply, "LME LATEST - Metals struggle to attract buying interest."

Our indomitable Moscow metals reporter Maria Kolesnikova adds a few more words to describe the change in market sentiment in her morning Bloomberg report:

Copper May Fall for Fourth Day on Concern About Inflation Curbs (Maria Kolesnikova, Bloomberg News, Feb 10, 2011 5:29 AM PT)

She's right, COMEX copper is falling...falling.

The ole Colonel told Adella Harding the other day that we were at a key inflection point for mining stocks. This is taken from her Elko Daily Free Press article:

"There are some early signs that the corrective phase in mining stocks may be coming to a close. If so, Jan. 28 marks the bottom of the recent correction," Richard Baker wrote on his Eureka Miner blog.

"If everything moves south in the next few days, the correction may be quite a bit longer," he said.

"It will be important to watch the correlation of copper and gold prices going forward - if the three-month correlation remains negative, we may have to wait for spring to witness a bump in the mining sector," Baker said. (Gold prices up on inflation worries,
ADELLA HARDING, Mining Editor Elko Daily Free Press, February 8, 2011 3:26 pm PT)

I'm not ready to throw in the towel yet but today's metal weakness coupled with a drop in gold and silver prices is not encouraging. Here is the action in the London spot markets:




Things to watch for...

The broader markets are now open and it looks like a bruiser for the mining stocks. How do we know if this is a one-day blip or that we are indeed moving "south"? Here are some key things to watch:

1) The Eureka Miner's Index(EMI) rolls up benchmark miners, interest rates, market volatility and key metal prices into one number. The report has been using this gauge since last year to test market temperature. The EMI hit a high on the first market day of 2011 and has been trending down ever since. January 28th was a low point at 447.4 and prompted my above comment to Adella. If we don't revisit this low water mark there may be blue skies behind the gathering clouds. Today (see below) we are at 517.3 which is under the 1-month EMI moving average of 577.6. Perhaps more ominously, the average is in its second day under the upper trend line. All this mumbo-jumbo is a bearish sign.

2) Our bellwether mining stock Freeport-McMoRan (FCX) has been struggling since setting a 52-week high on January 12th of $61.345. Even as copper prices were going up, FCX was fumbling around its 50-day moving average. It has since broken through that level and is just above the 100-day this morning. Falling below the 100-day will ring a loud bell in my ears. Here are the key levels to watch:

This morning's price/share = $53.06

50-day average (2/10/2011) = $56.84
100-day average (2/10/2011) = $52.41
200-day average* (2/10/2011) = $43.54

(* we use a 200-day value of $43.06 in the Eureka Outlook Dashboard because this warning level is changed monthly. The last update was 2/2/2011)

3) The 3-month correlation of copper & gold remains negative but there are some signs that this "inversion" my be shallow. This bodes well for an end to the mining stock correction. If copper & gold continue to go in opposite directions, we may be in the down elevator a lot longer. This morning the 3-month is -0.0885 but the 1-month has returned positive at +0.1500.

4) In the macro-world be wary of a rising 3-month LIBOR rate. After remaining quite low for some time, LIBOR has started creeping up again. It is sitting at 0.31% in a 52-week range of 0.25% to 0.54%. The dollar index is also up sharply this morning (.DXY 78.08 up 0.57%) on some new concerns about Europe's prodigal countries. A rising LIBOR and dollar are bearish for miners in this environment.

Daily Oil Watch

Last week we identified North Sea Brent crude oil as a good barometer for the developing crisis in Egypt. The most active front month contract remains above $100/bbl with a growing 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 $86.46
ICE North Sea Brent crude $101.73
Spread (ICE- NYMEX) = $15.27 (yesterday $13.25)

Here are the June contracts with a narrower spread:

NYMEX light sweet crude $94.72
ICE North Sea Brent crude $102.84
Spread (ICE- NYMEX) = $8.12 (yesterday $6.86)

Although prices are still off their crisis highs, we have $100+ Brent and mid-$90 NYMEX in June favoring 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.


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 517.29, down from from yesterday's 571.37 sitting below the 1-month moving average of 577.66. The EMI continues to trend down from the high set on January 4th.

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.

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 ON - The metals & miners have hit a rough patch; The VIX or "fear index" is below 25; bellwether Freeport-McMoRan (FCX) is below its 50-day moving average and just above its 100-day average. FCX is 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 $0.25 in early trading at $86.46 (March contract, most active); Gold is up $0.2 to $1364.3 (April contract, most active); Silver is up $0.346 to $29.930 (March contract, most active); Copper is down $0.0060 to $4.5180 (March contract, most active)

Western Molybdenum Oxide is $17.00; European Molybdenum Oxide is $17.92; LME moly 3-month seller's contract is $18.14, LME cash seller is $17.96

Stock Market Morning Update

The DOW is down 56.16 points to 12,183.73; the S&P 500 is down 5.55 at 1315.34. Miners are down:

Barrick (ABX) $47.36 down 1.37%
Newmont (NEM) $56.76 down 1.94%
US Gold (UXG) $6.98 down 2.87%
General Moly (Eureka Moly, LLC) (GMO) $5.17 down 2.27%
Thompson Creek (TC) $13.51 down 0.44%
Freeport-McMoRan (FCX) $53.06 down 1.54% (a bellwether mining stock spanning copper, gold & molybdenum)

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

ArcelorMittal (MT) $37.43 down 0.40% - global steel producer
POSCO (PKX) $107.55 down 0.30% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is is down 1.32% at $1,731,993.92(what's this?).

Cheers,

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