"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, March 7, 2011

$1445+ Gold, $36+ Silver, $106+ Oil - Metals & Miners Weekly Roundup

Morning Miners!

It is 5:39 AM. Grab a cup of Monday ether and let's get your diesel started - we've got a lot of work to do...

Mining Quarterly Spring of 2011

Before we get rolling, here's something fun. Look to your right and you will find updated links to Adella Harding's terrific Mining Quarterly. The Spring 2011 issue has just been published and you can access it through a new interactive full-color/full-page application on the Elko Daily Free Press website. There are articles and updates on Long Canyon, Bald Mountain, Robinson Mine, Round Mountain and much more.

If you missed the Winter 2011 edition, click on "Mining Quarterly Archive" and you can view it in this improved format. The ole Colonel prefers to read his hard-copy Quarterly in his rocker by the the wood stove but these links give you a great sneak preview of what's coming and what's in the rear view mirror. Happy reading, pardner.

Oil & Metals Outlook

The unresolved crisis in North Africa and Middle East trumped a good U.S. jobs report last Friday. More jobs, recovering economies but higher oil prices - the yin-yang of markets today and perhaps many more days to come.

When I made my December predictions for 2011, I felt some change in the global economy would bring $100+/bbl oil sometime before mid-year and those same conditions would drive silver and gold prices higher. We now know that trouble in the Arab world was the catalyst to higher oil. This morning oil, gold and silver all posted new records.

The action started at 7:50 AM ET when silver spiked to a new 31-year top at $36.735/oz; my December prediction was $36/oz. NYMEX light sweet crude followed silver to hit $106.95/bbl 15-minutes later. Brent crude, our barometer for the present oil crisis, didn't register a new record but is sitting comfortably above $116/bbl (see Daily Oil Watch below).

COMEX gold was the last tail in the barn making its new high 30-minutes after silver by nearly breaking $1450/oz at $1445.70/oz. This gives us a new low of 39.4 in the closely watched gold/silver ratio. The timing and low ratio underscore the growing strength of silver compared to gold. Here is a 10-year chart of the gold/silver ratio, we're in new pasture buckaroos:

I'll stick with my $1570/oz gold prediction although there are now indications gold could move higher this year. Bloomberg News carried a good video of T. Boone Pickens talking about oil prices against a growing backdrop of turmoil in the Middle East and North Africa:

Pickens on Oil Prices, Middle East Turmoil (Bloomberg News, 2/28/2011)

Boone's oil call for $120/bbl to $150/bbl or even higher supports rising precious metals prices in my book. This Report has noticed a downward trend in the gold/oil ratio and the one-month correlation is a tight 0.86 (see analysis below). If we take this morning's number ratio of 13.6 bbl/oz instead of the 3-month average ratio of 15.2 bbl/oz, Boone's numbers give us a possible range for gold prices of $1,630/oz to 2,040/oz. Using the above gold/silver ratio, this suggests a range for silver prices of $41/oz to $52/oz. The ardent goldbugs have been talking about $2,000/oz gold and $50/oz silver for some time. Something to think about pardner, stay tuned.

Here is the record book for our big three metals together with NYMEX and ICE Brent crude oil after today's trifecta:

COMEX Gold $1445.70/oz 08:20 ET 03/07/2011, April contract most active
COMEX Silver $36.745/oz 07:50 ET 03/07/2011, May contract most active
COMEX Copper $4.6375/lb 06:15 ET 02/04/2011, March contract most active
NYMEX WTI Crude $106.95/bbl 08:05 ET, 03/07/2011, April contract most active
ICE Brent crude $119.79/bbl 02:45 ET 02/24/2011, April 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, 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 412.60, down from from Friday's close at 416.84 and below the 1-month moving average of 536.29. The EMI continues to be down from the high set on January 4th and moving sideways with a new 2011 low set February 24th of 408.67.

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 $105.50
ICE North Sea Brent crude $116.89
Spread (ICE- NYMEX) = $11.39 (Last Friday $12.45)

Here are the June contracts with a narrower spread:

NYMEX light sweet crude $107.54
ICE North Sea Brent crude $116.62
Spread (ICE- NYMEX) = $9.08 (Last Friday $10.61)

Although prices are off their crisis highs, we have $100+ Brent and NYMEX in June favoring higher oil prices for the summer. My December prediction that we would 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 returning to the commodity space, diminishing correlations between key commodities are less alarming but trends should still be carefully monitored especially with spiking oil prices.

Here are the latest correlations given this morning's NYMEX/COMEX trading:

Oil/Au correlation +0.8605 (1-month) +0.6433 (3-month)
Cu/Au correlation -0.5155 (1-month) -0.1000 (3-month)
Cu/Oil correlation -0.4976 (1-month) +0.1780 (3-month)

Here are the numbers from the last roundup (2/28/2011):

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)

We still have as many negative as positive correlations. Oil and gold have moved in a strong positive direction; copper and gold remain in a solid inversion (i.e. both one-month & three-month value correlations are negative). Copper and oil remain mixed with only a small change in the 3-month. The metals & miners tend to do best when all correlations are positive.

According to my new March models (see bottom of blog page): oil is presently overvalued with respect to gold by +4.66-standard deviations and copper is overvalued by 1.69-standard deviations. Copper is presently under-valued with respect to oil by -0.12-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. There does seem to be movement towards the "-,+" region now which is less bearish for copper/gold.

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.". The mining sector remains in correction except gold miners are getting some lift with rising gold prices.

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.

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

Gold:Oil ratio

mean 15.21 bbl/oz
variation > 3.0% limit at 3.69% (1-standard deviation/mean)

Oil:Copper ratio

mean 20.80 lbs/bbl
variation > 3.0% limit at 5.27% (1-standard deviation/mean)

Gold:Copper ratio

mean 316.0 lbs/oz
variation > 3.0% limit at 4.05% (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 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).

On February 23rd I 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 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 $17.24/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 although the Middle East crisis must be watched closely. 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 $37,500/metric ton $17.01/lb

3-Month (Buyer) $36,000/metric ton $16.33/lb
3-Month (Seller) $38,000/metric ton $17.24/lb

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

Here is a 1-year chart of the LME 3-month contract (seller):

Daily Market Roundup

Enough talk, let's walk the walk:

Eureka Outlook Dashboard

4-WD is ON - The miners are still in a rough patch; The VIX or "fear index" is below 25; bellwether Freeport-McMoRan (FCX) remains trapped between its 100-day and 150-day moving averages but still above its 200-day average of $44.85 (our new warning level, 03/04 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 RED light is turned on our Fuel Gauge with oil above $100

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, Obama budget includes mining royalty , Mineral commission fights consolidation

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

Commodity Market Morning Update

NYMEX/COMEX: Oil is up $1.08 in early trading at $105.50 (April contract, most active); Gold is up $8.5 to $1437.1 (April contract, most active); Silver is up $1.103 to $36.430 (May contract, most active); Copper is down $0.0100 to $4.4755(May contract, most active)

Western Molybdenum Oxide is $17.00; European Molybdenum Oxide is $17.75; LME moly 3-month seller's contract is $17.24, LME cash seller is $17.01

Stock Market Morning Update

The DOW is up 20.17 points to 12,190.05; the S&P 500 is up 1.01 at 1322.16

Miners are mixed:

Barrick (ABX) $53.39 up 1.06%
Newmont (NEM) $54.77 up 0.92%
US Gold (UXG) $8.28 up 2.73%
General Moly (Eureka Moly, LLC) (GMO) $5.23 up 0.77%
Thompson Creek (TC) $13.01 down 0.91%
Freeport-McMoRan (FCX) $52.07 up 0.70% (a bellwether mining stock spanning copper, gold & molybdenum)

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

ArcelorMittal (MT) $36.49 down 0.16% - global steel producer
POSCO (PKX) $102.63 down 1.62% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is is up 1.10% at $1,843,337.87 (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).

Headline photograph by Mariana Titus

Write Colonel Possum at colonelpossum@gmail.com for answers to your questions or to request e-mail updates on the market

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