Gartman Bearish on Metals; Freeport Broken; EMI Dives

Morning Miners!

It is 5:44 AM. Happy Mardi Gras! Have a cup of Community Coffee, Louisiana's finest. The ole Colonel is taking Ruby T, Mariana and Thor to Reno tonight for a little celebration. Old miner Woden will stay here to bring in Wednesday but don't count on a Report tomorrow. Laissez les bons temps rouler!

Gartman Bearish on Metals

Let's keep it simple - this is not a great morning for the metals and miners. Dennis Gartman, Commodity King and author of the respected Gartman Letter, declared he was bullish on gold last Thursday. That's good.

Gartman threw up a red flag on copper and the base metal complex this Tuesday. That's bad. Kitco carried his assessment this morning in their Market Nuggets:

Newsletter writer Dennis Gartman cites concern about copper and its implications for the economy. Comex copper gapped lower Monday and is at risk of breaking below an upward sloping trendline extending back into last year. “Worse, for copper is the fact that the charts of the other industrial metals are beginning to turn bearish,” he says in The Gartman Letter. And, he points out, copper inventories have been rising, with Shanghai Futures Exchange stocks now just over 150,000 metric tons and approaching the highs made nine months ago. “This cannot be bullish news,” he says. He cites a commodity adage that copper, zinc, tin and aluminum collectively have a “Ph.D.” in economics due to their tendency to reflect future economic trends through their price movement. “At the moment, copper is looking manifestly bearish and argues for a slowing of global economic circumstances,” Gartman says. “Tin is turning quietly so; tin and aluminum have not yet, so the economic jury is still out. Nonetheless, copper’s weakness has our interest.” As of 8:19 a.m. EST, Comex May copper was 4.85 cents lower at $4.2785 a pound. (Kitco Market Nugget, 3/8/2010)

Here's how Bloomberg News reported the story on copper's decline:

Copper Falls to Two-Week Low as Higher Oil Prices May Curb Economic Growth (Agnieszka Troszkiewicz, 3/8/2011, 4:06 AM PT)

Gold trending up, copper trending down. This Report has been pointing out this "inverted" relation for several weeks; a bearish relation for the metals & mining sector. Here is how it looks graphically using my latest copper/gold model for March (a larger, more readable plot is given near the bottom of this blog page):



The straight magenta line is copper's "fair value" of COMEX copper with respect to COMEX gold given the last 3-months of data. It is going from the upper left to the lower right of the graph - this Report (and Dennis Gartman) likes things that go from the lower left to the upper right. The aqua lines represent the upper and lower bounds for copper price above and below fair value for different gold prices. The dark blue line is the actual futures data; the yellow line shows the most recent price action. The 1-month moving average (light blue) is topped out and moving sideways. For last Friday (March 4th), copper is showing an overvalued state with respect to gold falling just below the upper limit.

This morning (not shown), copper price is falling back toward fair value at $4.2840/lb (+0.52 standard deviations for the statistics buffs). If we pick $1440/oz gold as a nominal price for March then:

The fair value of copper is $4.1732/lb within a range of $3.8246 to $4.5218/lb

Copper has been our faithful canary in the global mineshaft, if she's flying down the shaft we may be in trouble. Oh, and another thing...

Freeport McMoRan (FCX) is technically broken

The broader markets are now open and our bellwether miner Freeport-McMoRan (FCX) has just fallen though its 150-day moving average (present price is $48.76; 150-day point is $49.11). In late January of last year a similar condition occurred and our friend Dennis Gartman declared Freeport to be "technically broken." This is how we reported that event:

"The fate of Freeport is important because it is often considered the bellwether of mining stocks by the investment community. Yesterday on CNBC, Dennis Gartman, the 'Commodity King', declared Freeport 'technically broken' and saw rocky roads ahead for metals and miners in the near term." (Eureka Miner's Market Report, 1/29/2010)

Although Freeport managed an April rally last year it fell to new depths mid-year hitting its low for the year in early July. Copper and gold were in the bearish "inverted" state through much of this period. But wait, there's more...

The Eureka Miner's Index Dives

The Eureka Miner's Index(EMI), which tells us the market temperature for the factors that influence mining in Eureka County, just plumbed a new low for the year at 328.9 (see below). This reinforces a downward trend since the high of 816.8 on January 4th. When Freeport was in decline last year, the EMI hit a low of 50.7 on 6/7/2010. We're a lot better off than those days but the Colonel doesn't like the trend - let's put on our beads and head to Reno! Laissez les bons temps rouler!

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. The most active front month contract remains 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 this volatile region.

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

NYMEX light sweet crude $105.53
ICE North Sea Brent crude $113.70
Spread (ICE- NYMEX) = $8.17 (yesterday $11.39)

Here are the June contracts with a narrower spread:

NYMEX light sweet crude $107.33
ICE North Sea Brent crude $113.99
Spread (ICE- NYMEX) = $6.66 (yesterday $9.08)

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


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 328.88 diving from yesterday's 412.60 and below the 1-month moving average of 527.04. The EMI continues to be down from the high set on January 4th and a trend reversal in the short term is now unlikely.

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 miners are in a rough patch; The VIX or "fear index" is below 25; bellwether Freeport-McMoRan (FCX) just dropped its 150-day moving averages but is 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 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 $0.09 in early trading at $105.53 (April contract, most active); Gold is down $2.9 to $1431.6 (April contract, most active); Silver is up $0.235 to $36.100 (May contract, most active); Copper is down $0.0430 to $4.2840 (March contract, most active)

Western Molybdenum Oxide is $17.00; European Molybdenum Oxide is $17.75; LME moly 3-month seller's contract is $17.51, LME cash seller is $17.30

Stock Market Morning Update

The DOW is down 69.85 points to 12,188.35; the S&P 500 is down 8.75 at 1322.22

Miners are not happy:

Barrick (ABX) $52.46 down 1.00%
Newmont (NEM) $53.04 down 1.19%
US Gold (UXG) $7.78 down 4.31%
General Moly (Eureka Moly, LLC) (GMO) $5.05 down 2.32%
Thompson Creek (TC) $12.47 down 1.81%
Freeport-McMoRan (FCX) $48.76 down 2.75% (a bellwether mining stock spanning copper, gold & molybdenum)

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

ArcelorMittal (MT) $35.01 down 2.12% - global steel producer
POSCO (PKX) $102.29 up 0.68% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is is down 1.70% at $1,783,705.93 (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).

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