"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.

Thursday, March 10, 2011

Gold = Oil; Markets Slump

Wither Thou Goest, I Will Go

Morning Miners!

It is 6:19 AM. Have a cup of Thunder and check out sleeping beauty. Our Favorite Norseman Thor is sleeping off our big blowout in Reno. Not much rumble in his thunder. The ole Colonel had to start up Thursday without him - believe me it could be Friday today if I hadn't remembered all the steps! Say, not much rumble in these markets either...

Gold = Oil

After a lazy start to the year, the troubles in North Africa and the Middle East have put gold back in the fight. Gold hopped a ride with oil and both headed north as copper and other base metals traveled south. On Monday NYMEX Oil topped out at $106.95/bbl and COMEX gold shot up to $1,445.70/oz. This morning the 1-month correlation of oil and gold is an amazing 0.96 - that's a statistical way of saying wherever oil goes, gold follows (almost). A correlation of 1.0 joins these two global twins at the hip.

The only problem with a tight correlation is that when oil drops, gold drops too. This morning NYMEX crude is down 4% from Monday's glory trading presently at $102.93/bbl; COMEX gold is down 2% at $1,420.0/oz. If something improves dramatically in Libya the oil experts believe oil will retreat to the fundamental support of supply and demand - probably somewhere between $85 and $90/bbl for NYMEX WTI (see note 1). Gold will likely follow its new buddy back to $1300/oz country or possibly lower.

If Libya worsens or a new flare up occurs in Saudia Arabia or Iran put on your set belts - The twins return north. On a $120/bbl - $150/bbl spike in NYMEX WTI, gold could find itself trading at $1,660/oz to $2,070/oz given this morning's gold:silver ratio. That's called volatility, pardner. Stay tuned.

Markets Slump

The markets are now open and it's a bad one. The DOW and S&P 500 are both down 1.6% with the latter falling below the psychologically important 1,300 level. The Eureka Miner's Index(EMI) has fallen to yet another new low for the year of 271.3. We were at a high of 816.8 on January 4th to give this some perspective. At this new EMI level we find ourselves back in early October. The EMI gauges the temperature for the market factors that influence mining in Eureka County including benchmark miners, metal prices, interest rates and market volatility. Nuts.

The Eureka Miner's Grubstake Portfolio is also being taken to the wood shed. Our twelve favorite stocks are down 3.4%, more than twice the fall of the broader markets.

We'll explore this market malaise further tomorrow. I think I hear Thor getting up, let's go chuck a thunderbolt or two in Newark Valley.

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 $102.93
ICE North Sea Brent crude $114.74
Spread (ICE- NYMEX) = $11.81 (yesterday $10.78)

Here are the June contracts with a narrower spread:

NYMEX light sweet crude $104.95
ICE North Sea Brent crude $114.52
Spread (ICE- NYMEX) = $9.62 (yesterday $8.94)

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 271.28 diving further down from yesterday's 328.84 and well below the 1-month moving average of 499.20. 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 real rough patch; The VIX or "fear index" is below 25; bellwether Freeport-McMoRan (FCX) just dropped below its 150-day moving average 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 down $1.45 in early trading at $102.93 (April contract, most active); Gold is down $9.6 to $1420.0 (April contract, most active); Silver is down $0.692 to $35.355 (May contract, most active); Copper is down $0.0355 to $4.1770 (March contract, most active)

Western Molybdenum Oxide is $17.00; European Molybdenum Oxide is $17.60; LME moly 3-month seller's contract is $17.24, LME cash seller is $17.03

Stock Market Morning Update

The DOW is down 189.20 points to 12,023.89; the S&P 500 is down 20.42 at 1299.60

Miners are boo-hooing:

Barrick (ABX) $50.45 down 2.36%
Newmont (NEM) $51.87 down 1.35%
US Gold (UXG) $7.21 down 7.21%
General Moly (Eureka Moly, LLC) (GMO) $5.03 down 2.90%
Thompson Creek (TC) $11.75 down 4.32%
Freeport-McMoRan (FCX) $46.66 down 3.69% (a bellwether mining stock spanning copper, gold & molybdenum)

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

ArcelorMittal (MT) $34.15 down 2.76% - global steel producer
POSCO (PKX) $100.28 down 3.12% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is is down 3.42% at $1,727,056.04 (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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