"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, April 1, 2011

8.8% Unemployment; Oil breaks $107/bbl; "...nothing to celebrate"

Morning Miners!

It is 5:21 AM. Have a Friday cup of Raine's No Foolin' java. The ole Colonel has CNBC Business News fired up, it's time again for the monthly labor report...

"A positive report" but "...nothing to celebrate"

Waiting for the monthly unemployment number to go down is like waiting for snow to melt on Diamond Peak. The economy is steadily improving and it is spring; there are more new jobs and there will be less white stuff around in a few months. The official unemployment rate fell in March to its lowest level in two years, 8.8% versus an 8.9% rate in February.

Last month, we noted that the reaction to the Labor Department's numbers is usually captured by a memorable quote from one of the CNBC Business News commentators. This morning it was two quotes. CNBC reporter John Harwood, who announced the numbers, called it a "...positive report." Mesirow Financial Chief Economist Diane Swonk said 8.8% was "...nothing to celebrate." They are both right; 216,000 more jobs but there are still about 13.5 million people who would like to work but can't get a job.

The broader unemployment number called "U6" is the "Official" unemployment rate plus "discouraged workers", "loosely attached workers" and all manner of other folks without a job that miss the narrower nose count (see note 2). The good news is that it dropped to 15.7% from 15.9%; the bad news is that IT IS 15.7%. Slowly melting snow.

It is always interesting to watch the instant market reaction to the Labor Department news: gold down, copper so-so, U.S dollar index up, 10-year Treasury Note yield up. COMEX gold initially dropped $16.7 from a peak of $1437.70/oz before the announcement to $1421.0/oz shortly after and then dribbled up some to where it is presently trading at $1422.6/oz. COMEX copper wiggled a mere 2-cents, now at $4.2485/lb - copper traders are apparently more focused on what may happen next in China than a 0.1% drop in U.S. unemployment. Here's the latest Bloomberg morning story on the red metal:

Copper Drops, Heads for First Weekly Fall in Three, on China Rates Concern (Glenys Sim, Bloomberg News, Mar 31, 2011 11:02 PM PT)

Interest rates pushed through a "psychological" level for the 10-year T-note of 3.5%. Interest rates in Europe are expected to get a bump up by the ECB to combat inflation expectations so the difference in rates between the U.S. and Europe has a lot of impact on the U.S. dollar and gold. This morning the dollar strengthened against the euro putting some pressure on commodities. Investors seeking yield are expected to continue a transition from gold to government bonds with improving interest rates (gold does not generate income, bonds do). So it goes.

But wait - there is a BIG gorilla in the global recovery living room. NYMEX oil broke $107 this morning to set a new high of $107.84/bbl. Brent crude is above $117/bbl again (see Daily Oil Watch below). This has less to do with unemployment numbers and a lot more to do with the deteriorating conditions in the oil-rich Arab world. I have heard several experts say that the global recovery can keep bobbling along unless oil reaches the $110-$120/bbl level for an extended period. Yikes, NYMEX oil is getting mighty close to the danger zone although it has now fallen back to $106.76/bbl. No foolin', pardner.

Here's a new update for 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 $107.84/bbl 08:55 ET, 04/01/2011, May contract most active
ICE Brent crude $119.79/bbl 02:45 ET 02/24/2011, April contract most active

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 459.56, up from yesterday's 457.04 and above the 1-month moving average of 374.87. 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 below-par at 69.77, down from yesterday's 70.12. The 1-month moving average is 70.95. Today's Value Adjusted Gold Price (VAGP) is $1,703.78/oz.

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 of 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.

The Value Adjusted Gold Price (VAGP) is a level that supports current oil, copper & oil prices based on historical commodity norms. If the daily COMEX gold price is below the VAGP, then gold is undervalued; if above, overvalued.

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 $106.76
ICE North Sea Brent crude $117.26
Spread (ICE- NYMEX) = $10.50 (Yesterday $10.81)

Here are the July contracts* with a narrower spread:

NYMEX light sweet crude $107.70
ICE North Sea Brent crude $116.81
Spread (ICE- NYMEX) = $9.11 (Yesterday $9.49)

*(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.

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) is just above its 50-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, Democrats seek to repeal mining tax from the constitution, Rhoads, Ellison oppose repeal of net proceeds tax

Otherwise, all lights are green on the Eureka Outlook Dashboard (upper right, what's this?)

Commodity Market Morning Update

NYMEX/COMEX: Oil is up $0.04 in early trading at $106.76 (May contract, most active); Gold is down $17.3 to $1422.6 (June contract, most active); Silver is down $0.593 to $37.295 (May contract, most active); Copper is up $0.0590 to $4.2485 (May contract, most active)

Western Molybdenum Oxide is $17.00; European Molybdenum Oxide is $16.95; LME cash seller is $17.26, LME moly 3-month seller's contract is $17.46

Stock Market Morning Update

The DOW is up 20.70 points to 12,340.43; the S&P 500 is up 4.68 at 1330.51

Miners are mixed:

Barrick (ABX) $52.01 up 0.19%
Newmont (NEM) $54.34 down 0.44%
US Gold (UXG) $8.75 down 0.91%
General Moly (Eureka Moly, LLC) (GMO) $5.42 up 0.74%
Thompson Creek (TC) $12.61 up 0.56%
Freeport-McMoRan (FCX) $54.98 down 1.03% (a bellwether mining stock spanning copper, gold & molybdenum)

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

ArcelorMittal (MT) $35.88 down 0.75% - global steel producer
POSCO (PKX) $114.66 up 0.32% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is is down 0.19% at $1,904,879.87 (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 (source: Wikipedia)

Note 2 - The Bureau of Labor Statistics calculates five alternate measures of unemployment, U1 through U6, that measure different aspects of unemployment:

* U1: Percentage of labor force unemployed 15 weeks or longer.
* U2: Percentage of labor force who lost jobs or completed temporary work.
* U3: Official unemployment rate per the ILO definition occurs when people are without jobs and they have actively looked for work within the past four weeks.
* U4: U3 + "discouraged workers", or those who have stopped looking for work because current economic conditions make them believe that no work is available for them.
* U5: U4 + other "marginally attached workers", or "loosely attached workers", or those who "would like" and are able to work, but have not looked for work recently.
* U6: U5 + Part time workers who want to work full time, but cannot due to economic reasons (underemployment). (source: Wikipedia)

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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