"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 28, 2011

Oil, Gold & Copper Down, Freeport Up - Metals & Miners Weekly Roundup

Morning Miners!

It is 5:52 AM. Have a hot cup of Monday go-java. My dog Henry used to tell me, "Never fear the markets!" I sure miss that ole boy...

Oil & Metals Outlook

Last Monday we talked about how the recent global upheaval has created a tug-of-war of worry between supply disruption (prices up) and demand destruction (prices down). If someone says, "multiple melt-downs" Japanese nuclear reactors may come to mind or the spreading country-by-country unrest in the oil rich Arab world. One or both could happen or is happening already, nobody seems to know for sure.

What's a commodity price to do with all this uncertainty? Fundamental support for NYMEX oil is in the $85-$90/bbl range but it seems $100+/bbl oil will be with us for sometime (see Daily Oil Watch below). Further crisis escalation in North Africa and the Middle East could easily spike us to $120-$150/bbl. That was true last Monday and is still true today. Anti-government forces have made progress in retaking key towns over the weekend including the Libyan oil hub Ras Lanuf. NYMEX oil has dropped $1.68 to $103.72/bbl this morning. Good news but oil is still $100+/bbl.

Copper has been particularly resilient to all manner of shocks this year but took a hit this morning on the demand destruction side of the equation as reported by Bloomberg News:

Copper Falls Most in Two Weeks as Japanese Carmakers May Suspend Activity (Agnieszka Troszkiewicz, Bloomberg News, Mar 28, 2011 5:42 AM PT)

The gist of this article is concern that Japanese carmakers may have to suspend production at plants in China, potentially curbing demand for industrial metals. Even domestically, General Motors is shutting a plant in Louisina whose trucks depend on Japanese produced components. It is an interconnected world, pardner.

Copper is important to us because it has proven to be a reliable proxy for global growth. Although copper is down this morning, our bellwether miner Freeport-McMoRan has been showing signs of life lately. It closed above both its 50-day moving average Friday trending up since its March 15th low.

This Report's Eureka Miner's Index(EMI), which includes Freeport, also punched in a low on that day but has been moving up above its 1-month moving average recently (see below). Is this a spring renaissance for our miners that have been struggling since January?

Gold has been up in price but down in value for nearly 10 months as we showed with our Gold Value Index (GVI) introduced last week. Mining Editor Adella Harding included the Eureka Miner's GVI in her Friday article for the Elko daily Freepress:

Gold prices slip after hitting record (ADELLA HARDING Mining Editor, Elko Daily Free Press, Friday, March 25, 2011 3:59 pm)

We will update the GVI in a moment (see below) and talk about it more this week. Some additional thoughts will include developing a "fair value" price for gold given the price action of key commodities - oil, copper and silver.

Here's an interesting piece in Mineweb on some on how gold is likely to outperform base metals in the second half of the year but may see headwinds if there is a U.S. interest rate hike:

Gold to top out around $1,500 in Q4 2011 – SocGen (Rhona O'Connell, Mineweb, Friday , 25 Mar 2011)

Finally, European moly oxide fell below its lower tend-line last week falling to $16.72/lb. Although this is not a big drop from $17 territory, we were looking for movement toward $20/lb before all hell broke loose. The up-trend has been a good sign since last July; breaking it is a bearish indication.

It's a day-by-day headline-driven world my friend.

Eureka Miner's Index (EMI)

The broader markets are now open and it looks like copper giant Freeport-McMoRan (FCX) is up on a day that the red metal opened down - hard to stop a red metal bull, pardner.

The Eureka Miner's Index (EMI) gives us the market temperature for the factors that have the greatest impact on mining in Eureka County. Below is a chart of the EMI at Friday's close. The magenta line shows the EMI; a composite of three benchmark miners, key oil and metal prices, the 10-year Treasury rate and market volatility (.VIX). 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 448.82, down slightly from from Friday's close at 454.47 but above the 1-month moving average of 387.62. The EMI continues to be down from the high set on January 4th, it set a new 2011 low on March 15th. A trend reversal may be in the works.

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.

Gold Value Index (GVI)

Our newly minted Gold Value Index (GVI) is 69.73 above Friday's close of 69.40 which was a new low for 2011. The 1-month moving average is 71.36 and the GVI high for 2011 is 78.35.

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.

Below is a chart of the GVI at Friday's close. The magenta line shows the GVI, a 1-month moving average is given by the blue line and the dotted line represents a "fair value" for a commodity-based valuation based on historical data (a larger, more readable chart can be found near the bottom of the blog page):

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 $103.72
ICE North Sea Brent crude $114.66
Spread (ICE- NYMEX) = $10.94 (Last Friday $10.38)

Here are the July contracts* with a narrower spread:

NYMEX light sweet crude $104.80
ICE North Sea Brent crude $114.22
Spread (ICE- NYMEX) = $9.42 (Last Friday $9.03)

* (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.

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 +0.7171 (1-month) +0.8215 (3-month)
Cu/Au correlation +0.4056 (1-month) -0.1971 (3-month)
Cu/Oil correlation +0.1054 (1-month) -0.3291 (3-month)

Here are the numbers from the last roundup (3/21/2011):

Oil/Au correlation +0.8522 (1-month) +0.7814 (3-month)
Cu/Au correlation +0.0157 (1-month) -0.2128 (3-month)
Cu/Oil correlation -0.2750 (1-month) -0.3183 (3-month)

We now have more positive than negative correlations. Oil and gold continue to move in a strong positive direction. Copper versus gold & copper versus oil have both stepped outside their inversions (i.e. both one-month & three-month value correlations are negative) as their 1-month correlations trend more positive. The metals & miners tend to do best when all correlations are positive.

According to my March models (see bottom of blog page): oil is presently overvalued with respect to gold by +4.43-standard deviations and copper is overvalued by +0.69-standard deviations. Copper is presently under-valued with respect to oil by -0.66-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 was a bearish development but its continuing trend into the "+,- region is encouraging. Stay tuned.

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 have diverged. 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.

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 14.793 bbl/oz
variation > 3.0% limit at 5.07% (1-standard deviation/mean)

Oil:Copper ratio

mean 21.43 lbs/bbl
variation > 3.0% limit at 8.32% (1-standard deviation/mean)

Gold:Copper ratio

mean 315.9 lbs/oz
variation > 3.0% limit at 4.00% (1-standard deviation/mean)

Weekly Molybdenum Roundup

Spot prices for molybdenum oxide remain in $17/lb territory out West but dipped below to $16.72/lb in Europe breaking below a its lower trend-line established since July 2010. Western and Euro moly spot prices are now in a very light contango with both 3-month and 15-month London Metal Exchange (LME) 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 is at $17.01/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 and Japan 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) $16.72/lb (the price reported in the Metals Bulletin)

LME Futures Contracts

LME cash seller is at $37,050/metric ton $16.81/lb

3-Month (Buyer) $36,250/metric ton $16.44/lb
3-Month (Seller) $37,500/metric ton $17.01/lb

15-Month (Buyer) $37,550/metric ton $17.03/lb
15-Month (Seller) $38,550/metric ton $17.49/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 but there are some signs of improvement; The VIX or "fear index" is below 25; bellwether Freeport-McMoRan (FCX) is now above both 50-day and 150-day moving averages and 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 $1.68 in early trading at $103.72 (May contract, most active); Gold is down $13.2 to $1413.0 (April contract, most active); Silver is down $0.389 to $36.660 (May contract, most active); Copper is down $0.0610 to $4.3580 (May contract, most active)

Western Molybdenum Oxide is $17.00; European Molybdenum Oxide is $16.72; LME moly 3-month seller's contract is $17.01, LME cash seller is $16.81

Stock Market Morning Update

The DOW is up 37.84 points to 12,259.56; the S&P 500 is up 4.08 at 1317.88

Miners are mixed:

Barrick (ABX) $51.38 down 0.25%
Newmont (NEM) $53.83 down 0.24%
US Gold (UXG) $8.39 down 1.06%
General Moly (Eureka Moly, LLC) (GMO) $5.24 down 0.38%
Thompson Creek (TC) $12.58 up 0.08%
Freeport-McMoRan (FCX) $55.31 up 1.39% (a bellwether mining stock spanning copper, gold & molybdenum)

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

ArcelorMittal (MT) $36.05 up 0.84% - global steel producer
POSCO (PKX) $114.22 up 0.55% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is is down 0.15% at $1,873,665.19 (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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