"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 11, 2011

Tsunami; Gold = Oil (Part II)

Morning Miners!

It is 4:21 AM. Have a cup of Raine's and let's check the early, early morning news...

Massive earthquake hits Japan, West Coast tsunami warnings

If you haven't heard already, there was an 8.9 earthquake in Japan last night at 9:45 PM PT. There are now tsunami warnings and advisories along our entire west coast. For the faithful readers that know the ole Colonel has a second home in Santa Babara, there is nothing to worry about. Our place is south of Point Conception and in the advisory, not warning, zone. The poor folks in Crescent City may have a different morning where some damage is expected in areas with a tsunami history. The west coast will be hit after 7:00 AM PT; Santa Barbara arrival time is estimated to be 8:17 AM PT.

This Report offers its sympathy to the people of Japan who are still living the horrific consequences of the fifth largest earthquake recorded since 1900.

Gold & Oil steady through the tremor

In the cold calculus of markets, COMEX gold didn't move much at all as the earth trembled on the Pacific Rim. Here is how glitter reacted to the 8.9 quake in overnight electronic trading:

12:30 AM ET $1412.5/oz, April contract most active
12:45 AM ET $1414.40/oz (time of quake)
03:30 AM ET $1419.30/oz post-quake high
09:23 AM ET $1411.20/oz (now)

Japanese bonds rallied in Asia as the yen strengthened some against the U.S dollar. Even though two Japanese refineries were burning, oil futures remained steady as traders waited to assess damage to Japan's oil infrastructure.

12:30 AM ET $101.70/bbl, April contract most active
12:45 AM ET $101.82/bbl (time of quake)
03:45 AM ET $101.88/bbl post-quake high
09:23 AM ET $99.90/bbl (now)

So far, the bigger story for gold and oil is the arm wrestling match between fear of a global slowdown and unrest in North Africa and the Middle East...

Gold = Oil (Part II)

Yesterday, the Report examined the tight positive correlation between oil and gold. Since shortly after the burning man in Tunisia, gold has followed oil as faithfully as the family dog - oil goes up, gold goes up; oil goes down, gold goes down.

There are two primary forces behind oil's price moves. Uncertainty in an oil-rich region of the planet brings fears of supply disruption and prices rise. High oil prices, inflation concerns in the emerging world, debt-worries in Europe and growth concerns in China bring fears of demand destruction and prices drop. Yesterday was a textbook example of both forces at play. Here is a plot of price moves (percent from opening price) of the gold ETF GLD (dark blue) and the oil ETF USO (light blue) throughout the trading day. The USO is related to futures contracts for NYMEX Oil (a larger, more readable chart is available at near the bottom of the blog page):

Yesterday began with fears of demand destruction as Spain's credit rating was downgraded and China reported an unexpectedly large trade deficit. Oil and gold prices moved down and then sideways for the morning (large blue arrow). In the early afternoon shots rang out in Saudi Arabia. Traders switched their fear to supply disruption in the mecca of global oil production and oil prices spiked. Gold predictably followed. When news arrived that the bullets were rubber and the incident less than cataclysmic, oil and gold prices slumped backed to their early morning prices.

It is interesting to note that oil's percent moves are approximately 1 to 2.5 times greater than GOLD'S. Yesterday's gold/oil correlation was +0.80; the one-month is a very tight +0.93. Stay tuned.

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 $99.90
ICE North Sea Brent crude $113.09
Spread (ICE- NYMEX) = $13.19 (yesterday $11.81)

Here are the June contracts with a narrower spread:

NYMEX light sweet crude $101.70
ICE North Sea Brent crude $112.94
Spread (ICE- NYMEX) = $11.24 (yesterday $9.62)

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 319.69 up from yesterday's 271.28 and well below the 1-month moving average of 487.15. 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) at 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 ORANGE light is turned on our Fuel Gauge with oil above $90

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 $2.80 in early trading at $99.90 (April contract, most active); Gold is down $1.3 to $1411.2 (April contract, most active); Silver is down $0.601 to $34.465 (May contract, most active); Copper is down $0.0640 to $4.1335 (March contract, most active)

Western Molybdenum Oxide is $17.00; European Molybdenum Oxide is $17.60; LME moly 3-month seller's contract is $17.40, LME cash seller is $17.60

Stock Market Morning Update

The DOW is down 27.48 points to 11,957.40; the S&P 500 is up 0.29 at 1295.40

Miners are mixed:

Barrick (ABX) $50.79 up 0.85%
Newmont (NEM) $52.34 up 1.95%
US Gold (UXG) $7.25 up 0.14%
General Moly (Eureka Moly, LLC) (GMO) $4.85 down 2.41%
Thompson Creek (TC) $12.28 up 3.02%
Freeport-McMoRan (FCX) $49.05 up 2.64% (a bellwether mining stock spanning copper, gold & molybdenum)

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

ArcelorMittal (MT) $34.35 up 1.06% - global steel producer
POSCO (PKX) $101.45 up 0.85% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is is up 0.27% at $1,730,524.12 (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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