"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, February 22, 2011

Silver & Oil Surge on Libya - Metals & Miners Weekly Roundup

Morning Miners!

It is 5:28 AM. Have a big cup of Tuesday joe, we got a big'un today. Sweet Ruby T was just telling me a tale about chugging up Emigrant Pass in her old Studebaker pickup. By the way, she just hauled in two new records with her big 379 Pete - that and much more...

Eureka County in Photographs (circa 1940s)

Today's headline photograph continues our series of photographs by Arthur Rothstein who captured images of Eureka County in the early 1940s (more detail at the bottom of this blog). The photo is of Emigrant Pass at the north end of the county between Nevada Highway 306 to the west and Highway 278 to the east. The pass road is south and roughly parallel to the Humboldt River. It formed a part of the Emigrant Trail network of overland wagon trails throughout the American West. The portion that followed the Humboldt River came to be known as the California Trail, heavily used from 1845-1869. It lead to several rugged wagon routes across the Carson Range and Sierra Nevada mountains to different parts of northern California. After 1848 the most popular route was the Carson Route since it was easier than most others and entered California in the middle of the gold fields.

Oil & Metals Outlook

The escalating conflict in Libya brought a new 31-year record for silver and a new eye-popper for Brent crude oil. In the late hours yesterday both peaked at the same time in electronic trading; COMEX silver hit $34.33/oz and Brent crude oil touched $108.70/bbl. This Report is using Brent crude oil as a barometer for the developing Middle East situation (see below).

Here's a record update for our big three metals and Brent:

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
ICE Brent crude $108.70/bbl 20:00:00 ET 02/21/2011, April contract most active

The beginning of 2011 was a period of rising copper, falling-to-sideways gold and resilient silver. Spreading Middle East troubles have replaced the copper rally with rising gold, silver and oil against a backdrop of falling base metal prices. Early morning headlines from the London Metal Exchange (LME) tell the story, "LME LATEST - Metals sharply lower, lead plummets more than 4 percent...Metals plunge as investors seek out safer assets."

Over the 3-day domestic market holiday, I relayed my reaction to the Libyan crisis to Adella Harding, Mining Editor of the Elko Daily Free Press. She carried some of my thoughts in her Monday article:

Gold price rises above $1,400 (ADELLA HARDING Mining Editor, Elko Daily Free Press, Monday, February 21, 2011 11:55 am)

Here is a quick update on copper's descent from Bloomberg metals reporter Glenys Sim:

Copper Drops for a Second Day as Oil Stokes Inflation Concerns (By Glenys Sim - Feb 21, 2011 11:53 PM PT Tue Feb 22 07:53:18 GMT 2011)

The closely watched gold/silver ratio is at a very low 42.3 with gold presently trading at $1403.0/oz and silver, at $33.205/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.

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 503.43, down sharply from from Friday's close at 602.11 and falling below the 1-month moving average of 550.70. The EMI continues its trend down from the high set on January 4th, a trend reversal now appears unlikely in the short-term.

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

On February 1st we identified North Sea Brent crude oil as a good barometer for the developing crisis in the Middle East. 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 Middle East.

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

NYMEX light sweet crude $96.33
ICE North Sea Brent crude $106.77
Spread (ICE- NYMEX) = $10.44 (Last Friday $11.68)

Here are the June contracts with a narrower spread:

NYMEX light sweet crude $98.68
ICE North Sea Brent crude $106.82
Spread (ICE- NYMEX) = $8.14 (Last Friday $8.93)

The spreads between NYMEX and Brent crude are narrowing to the upside 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. The August NYMEX futures contract is already $100.03/bbl this morning.

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 +0.1642 (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)

Here are the numbers from the last roundup (2/14/2011):

Oil/Au correlation +0.2506 (1-month) +0.3243 (3-month)
Cu/Au correlation 0.3249 (1-month) -0.0890 (3-month)
Cu/Oil correlation +0.0514 (1-month) +0.7289 (3-month)

All these correlations remain positive except copper and gold with a bearish negative three-month value and copper and oil now with a negative 1-month correlation. The metals & miners tend to do best when all correlations are positive.

Oil is presently overvalued with respect to gold by +2.69-standard deviations. The 3-month correlations of copper & oil is now 0.5 suggesting price correlation continues to weaken with a negative 1-month number. Copper is presently undervalued with respect to oil by a -2.83-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 and has been in the green quadrant longer. Correlation data in this region is typically considered bullish. The movement of oil into the "-,+" quadrant and copper into the "+,-" region is a bearish trend.

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 near peak values. 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.".

There were signs that the bottom of the correction was 1/28/2011 with prospects improving for the miners. The latest flare-up in Libya may delay this turn-around. Bellwether Freeport-McMoRan (FCX) has fallen through its 100-day moving average, a bearish sign indeed.

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. A current mean of 15.51 (below) indicates that NYMEX $100/bbl oil should easily support $1500+/oz gold. Here is a plot of that ratio since mid-2010 (a larger, more readable chart can be found near the bottom of the blog page):

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

Au/Oil ratio

mean 15.51 bbl/oz
variation > 3.0% limit at 3.183% (1-standard deviation/mean)

Oil/Copper ratio

mean 20.74 lbs/bbl
variation > 3.0% limit at 4.73% (1-standard deviation/mean)

Au/Copper ratio

mean 321.9 lbs/oz
variation > 3.0% limit at 6.37% (1-standard deviation/mean)

Weekly Molybdenum Roundup

Spot prices for molybdenum oxide remain in $17/lb territory out West and in Europe. Moly futures remain in a mild contango between spot prices and the London Metal Exchange (LME) 3-month and 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 $18.14/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) $17.82/lb (the price reported in the Metals Bulletin)

LME Futures Contracts

LME cash seller is at $39,600/metric ton $17.96/lb

3-Month (Buyer) $38,600/metric ton $17.51/lb
3-Month (Seller) $40,000/metric ton $18.14/lb

15-Month (Buyer) $38,300/metric ton $17.37/lb
15-Month (Seller) $40,300/metric ton $18.28/lb

Today is 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 below its 100-day moving average but still 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 up $6.62 in early trading at $96.33 (March contract, most active); Gold is up $14.4 to $1403.0 (April contract, most active); Silver is up $0.909 to $33.205 (March contract, most active); Copper is down $0.1030 to $4.3790 (March contract, most active)

Western Molybdenum Oxide is $17.00; European Molybdenum Oxide is $17.82; LME moly 3-month seller's contract is $18.14, LME cash seller is $17.96

Stock Market Morning Update

The DOW is down 61.60 points to 12,329.65; the S&P 500 is down 10.93 to 1332.08. Miners are mixed:

Barrick (ABX) $52.26 up 1.67%
Newmont (NEM) $59.17 up 1.15%
US Gold (UXG) $7.48 up 1.08%
General Moly (Eureka Moly, LLC) (GMO) $5.45 up 0.55%
Thompson Creek (TC) $13.83 up 0.51%
Freeport-McMoRan (FCX) $52.18 down 1.45% (a bellwether mining stock spanning copper, gold & molybdenum)

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

ArcelorMittal (MT) $36.57 down 1.88% - global steel producer
POSCO (PKX) $104.39 down 3.72% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is is up 0.27% at $1,816,475.15 (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 from the Library of Congress

Title: Emigrant Pass. Eureka County, Nevada
Creator(s): Rothstein, Arthur, 1915-1985, photographer
Date Created/Published: 1940 Mar.
Medium: 1 negative : safety ; 3 1/4 x 4 1/4 inches or smaller.
Reproduction Number: LC-USF34-029539-D (b&w film neg.)
Bookmark This Record: http://www.loc.gov/pictures/item/fsa2000010860/PP/

Rights Advisory: No known restrictions. For information, see U.S. Farm Security Administration/Office of War Information Black & White

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