"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.

Friday, March 25, 2011

Gartman, RBS Thoughts on Gold & Silver

Morning Miners!

It is 5:54 AM. Have a cup of delicious Raine's Red Label TGIF. Let's scratch our heads on gold & silver after Thursday's whirlwind...

Gold & Silver New Records

COMEX gold and silver both made new records yesterday. Gold started the race at 10:30 ET but silver quickly responded to break above $38/oz pegging $38.180/oz. COMEX gold inched out its March 7th watermark rising to a peak of $1,448.60/oz. The gold/silver ratio for the two records is at multi-decade low of 37.94. The steady decline in this closely watched ratio has not missed the attention of two savvy investors as we'll discover in a moment.

NYMEX oil came within a few cents of its latest record but fell back before making the score.

Let's update our record book for the big three metals together with NYMEX and ICE Brent crude:

COMEX Gold $1448.60/oz 10:30 ET 03/24/2011, April contract most active (new)
COMEX Silver $38.180/oz 10:50 ET 03/24/2011, May contract most active (new)
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

Gartman, RBS Thoughts on Gold & Silver

Kitco News carried Dennis Gartman's latest thoughts on gold, silver and equities in a "Market Nugget." Gartman is the author of the Gartman Letter and one of the Colonel's favorite metallic prognosticators.

Market Nuggets: Gartman: Silver Outperformance Vs. Gold Bodes Well For Equities (Kitco News, Market Nuggets, 3/25/2011)

Market Nuggets tend to be fleeting on this website so I'll try to boil down the message. Steve Cortes, a CNBC contributor and one of my other favorites, apparently showed Mr. Gartman a chart that indicated equities historically do well when the gold/silver ratio compresses and less well when it expands. Mr. Gartman says, when silver outperforms gold, as has been the case lately, "we must err bullishly of equities," and conversely when silver loses relative to gold, "we’ll err bearishly instead."

Mr. Gartman concludes, "We have long argued that silver’s strength relative to gold tells a story of economic growth, for silver is both industrial and precious, and the gold/silver ratio moves in silver’s favor when industrial activity is high and rising."

On June 7th 2010, arguably the worst day for the metals & miners, the gold/silver ratio was 68; today it is 38. But, according to the latest RBS Commodity Companion publication, the fortunes of gold & silver may change as we look towards the next several years. There is an informative article about this voluminous document on Mineweb this morning:

Aluminium, copper, PGMS to perform over next 3 years - RBS
(Rhona O'Connell, Mineweb, 24 Mar 2011)

Th gist of the summary is that RBS prefers aluminium, copper, platinum and palladium to bulk commodities and silver looking out to 2014. According to RBS, "gold, silver, coal and iron ore are now richly priced and set to fade." They are particularly down on silver, "Silver is the least preferred metal."

If RBS is correct we may see a drop in gold prices with a steeper decline in silver bringing the gold/silver ratio back to more typical levels seen before the collapse of Lehman Brothers, say 50-56. In that light $1400/oz gold would support $25-$28/oz silver prices. Pick your own numbers, pardner and stay tuned...they may also be wrong.

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 key front-month contracts as of this morning:

NYMEX light sweet crude $105.33
ICE North Sea Brent crude $115.71
Spread (ICE- NYMEX) = $10.38 (Yesterday $8.69)

Here are the July contracts* with a narrower spread:

NYMEX light sweet crude $106.29
ICE North Sea Brent crude $115.32
Spread (ICE- NYMEX) = $9.03 (Yesterday $7.76)

*(the most active front-month contracts are now May so we moved from June to July contracts for a 2-month look-ahead).

Although prices are off their crisis highs, we have $100+ Brent and NYMEX in July favoring higher oil prices through the summer. My 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 474.87, up from yesterday's 446.76 and above the 1-month moving average of 386.72. The EMI continues to be down from the high set on January 4th and up from the March 15th low of 262.02 - a trend reversal may again be in the works.

The EMI gives us the market temperature for the factors that have the greatest impact on mining in Eureka County. 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.

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.

Gold Value Index (GVI)

Our newly minted Gold Value Index (GVI) is 69.45 below yesterday's 69.62 setting a new low for 2011. The 1-month moving average is 71.70.

The GVI gauges the value of gold in relation to oil, copper and silver independent of currency. Although gold prices have been on the rise, the GVI has been trending down since 6/7/2010 when it had a value 0f 100. These three commodities were chosen for relative value comparison because 1) oil is a common cost element for all miners, 2) copper has been a reliable proxy for global growth and 3) silver is a precious metal that now competes with gold for investment and as a hedge against fiat currencies.

Eureka Outlook Dashboard

4-WD is ON - The miners are still in a real rough patch but Freeport may pull us out of the mud hole yet; The VIX or "fear index" is below 25; bellwether Freeport-McMoRan (FCX) moved above its 50-day and 100-day moving average today and is comfortably 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 down $0.27 in early trading at $105.33 (May contract, most active); Gold is down $0.7 to $1434.2 (April contract, most active); Silver is up $0.105 to $37.480 (May contract, most active); Copper is up $0.0275 to $4.4520 (May contract, most active)

Western Molybdenum Oxide is $17.00; European Molybdenum Oxide is $16.75; LME cash seller is $16.81, LME moly 3-month seller's contract is $17.01

Stock Market Morning Update

The DOW is up 29.67 points to 12,200.23; the S&P 500 is up 2.83 at 1312.49

Miners are mixed:

Barrick (ABX) $51.81 up 0.39%
Newmont (NEM) $54.73 up 0.39%
US Gold (UXG) $8.69 up 1.76%
General Moly (Eureka Moly, LLC) (GMO) $5.31 down 1.67%
Thompson Creek (TC) $12.53 down 0.24%
Freeport-McMoRan (FCX) $54.88 up 0.99% (a bellwether mining stock spanning copper, gold & molybdenum)

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

ArcelorMittal (MT) $36.26 up 0.19% - global steel producer
POSCO (PKX) $112.94 up 1.15% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is is up 0.47% at $1,888,777.95 (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 (Eureka December 2005)

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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