"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 21, 2011

Oil & Gold Up, Copper Steady, Moly Cautious - Metals & Miners Weekly Roundup

Morning Miners!

It is 5:56 AM. Have a Monday cup of fuel price jitters. It was a ball-the-jack evening run through Mojave, California, January 2006 - Gas was $2.37 and life was easy; that was then, this is now...

Oil & Metals Outlook

I guess we shouldn't be surprised that a war in Libya added to the fallout from Japan's horrific earthquake, tsunami and nuclear cliff-hanger would push oil prices higher. NYMEX crude rolled to a new contract last week and presently is trading at $103.83/bbl; Brent crude is grabbing for the $116 handle at $115.92/bbl (see daily oil report below).

There is considerable discussion on whether the net effect of all this global upheaval will be oil supply disruption (prices up) or demand destruction (prices down). Fundamental support is in the NYMEX $85-$90/bbl range but further crisis escalation in the Arab world could easily spike us to $120-$150/bbl with some experts claiming $200/bbl is on the horizon.

We start this week with a barrel of oil not only because it is an important cost to mining companies and ordinary Americans facing higher gas prices but gold has been tracking oil tighter than a barrel band. COMEX gold is up $15.6 today trading at $1431.7/oz with a tight 1-month correlation of 0.85 (see correlation watch below). In simple terms: oil goes up gold goes up and watch out for vice-versa if everything suddenly gets nice-nice. With the present oil/gold ratio of 13.8, gold could head to sub-$1300 territory or fly north to $1600+ or perhaps even $2000+. That's volatility, pardner. I'll stick with my prediction of $1,570/oz before the Fourth of July.

Remember, another important factor supporting gold's rise is currency instability. Last week the G7 economies intervened to blunt the rise of the Japanese yen - the U.S. dollar strengthened some but the euro got the biggest boost which put pressure on the U.S. Dollar Index (.DXY). This morning the .DXY is plumbing record depths - hang on to your dollars, they should make good kindling for cold mornings.

With all this turmoil how are the metals doing? Let's look at two of our favorites, copper and molybdenum. COMEX copper has been extremely resilient trading in a range of $4.30-4.38/lb since St. Paddy's Day. This morning it is down a bit but hanging in bravely at $4.3150/lb. Reuters this morning looks at some of the forces behind the red metal price:

METALS-Copper rises; eyes China tightening, MidEast turmoil (Reuters, Mon Mar 21, 2011 8:23am GMT)

Molybdenum has also put on a brave but more cautious face. European moly oxide dropped last week to $16.90/lb which is just on the lower trend-line from its steady rise from last summer. Western Moly is still unperturbed at $17.00/lb but we could see a drop here too (see Molybdenum Weekly Roundup below). Platts carried an article Friday on some of the pressures on the Chinese and European moly trade:

Sino-European molybdenum trade (Platts, Hong Kong--18Mar2011/956 am EDT/1356 GMT)

Eureka Miner's Index (EMI)

The broader markets are now open and it looks like they are climbing a wall of worry in full bull mode. The DOW is up 200 points and the miners are smiling (mostly).

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 358.73, up from from Friday's close at 307.33 and below the 1-month moving average of 408.48. The EMI continues to be down from the high set on January 4th, it set a new 2011 low on March 15th.

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 key front-month contracts as of this morning:

NYMEX light sweet crude $103.83
ICE North Sea Brent crude $115.92
Spread (ICE- NYMEX) = $12.09 (Last Friday $13.28)

Here are the July contracts* with a narrower spread:

NYMEX light sweet crude $104.84
ICE North Sea Brent crude $115.51
Spread (ICE- NYMEX) = $10.67 (Last Friday $11.35)

* (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 +0.8522 (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)

Here are the numbers from the last roundup (3/14/2011):

Oil/Au correlation +0.9547 (1-month) +0.7448 (3-month)
Cu/Au correlation -0.5077 (1-month) -0.1636 (3-month)
Cu/Oil correlation -0.5832 (1-month) -0.1235 (3-month)

We now have as many negative as positive correlations. Oil and gold continue to move in a strong positive direction. Copper versus gold is just stepping outside an inversion (i.e. both one-month & three-month value correlations are negative) as its 1-month turns positive this morning. Copper versus oil remain in a solid inversion . 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 +4.16-standard deviations and copper is overvalued by +0.70-standard deviations. Copper is presently under-valued with respect to oil by -0.90-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 movement into the "+,- region is encouragng. 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.

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 14.93 bbl/oz
variation > 3.0% limit at 4.54% (1-standard deviation/mean)

Oil:Copper ratio

mean 21.22 lbs/bbl
variation > 3.0% limit at 7.69% (1-standard deviation/mean)

Gold:Copper ratio

mean 315.8 lbs/oz
variation > 3.0% limit at 3.98% (1-standard deviation/mean)

Weekly Molybdenum Roundup

Spot prices for molybdenum oxide remain in $17/lb territory out West but dipped below to $16.90/lb in Europe. Western and Euro moly spot prices are now in mild 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) $16.90/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) $36,200/metric ton $16.42/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; The VIX or "fear index" is below 25; bellwether Freeport-McMoRan (FCX) is between its 100-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 up $1.98 in early trading at $103.83 (May contract, most active); Gold is up $15.6 to $1431.7 (April contract, most active); Silver is up $0.852 to $35.910 (May contract, most active); Copper is down $0.0240 to $4.3150 (May contract, most active)

Western Molybdenum Oxide is $17.00; European Molybdenum Oxide is $16.90; LME moly 3-month seller's contract is $17.01, LME cash seller is $16.81

Stock Market Morning Update

The DOW is up 205.55 points to 12,064.07; the S&P 500 is up 20.22 at 1299.42

Miners are mostly happy:

Barrick (ABX) $50.16 up 1.54%
Newmont (NEM) $51.17 up 0.55%
US Gold (UXG) $7.51 up 0.27%
General Moly (Eureka Moly, LLC) (GMO) $5.17 down 1.71%
Thompson Creek (TC) $12.65 up 0.96%
Freeport-McMoRan (FCX) $51.85 up 0.14% (a bellwether mining stock spanning copper, gold & molybdenum)

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

ArcelorMittal (MT) $35.37 up 2.25% - global steel producer
POSCO (PKX) $113.85 up 1.49% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is is up 0.88% at $1,803,919.39 (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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