"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, April 18, 2011

Au $1498; Ag $43.4; U.S. Down, Steels Up - Metals & Miners Weekly Roundup

Morning Miners!

It is 5:50 AM. Grab a cup of Monday Magic. Your taxes are done (I hope) and now it's time to fire up your D-9 and go-CAT go! Looks like Uncle Sam could use your money this morning...

Oil & Metals Outlook

Nothing like a U.S. outlook downgrade to spook the base metals. As reported by the Wall Street Journal this morning, "Standard & Poor's Ratings Services Inc. cut its outlook on the U.S. to negative, increasing the likelihood of a potential downgrade from its triple-A rating, as the path from large budget deficits and rising government debt remains unclear." (WSJ, 4/18/2010)

Ouch. Can't say the ole Colonel and the rest of the world wasn't expecting that one. The article quotes S&P credit analyst Nikola G. Swann, "More than two years after the beginning of the recent crisis, U.S. policy makers have still not agreed on how to reverse recent fiscal deterioration or address longer-term fiscal pressures."

The analyst puts the odds of a U.S. downgrade to at least one-in-three within two years. The response at the London Metal Exchange (LME) was immediate. In their words, "metals fall sharply...as U.S. outlook downgraded." COMEX copper fell below the key $4.25/lb level and is now trading at $4.2180/lb.

Nuts. We'll wait for the broader markets to open and see how the Eureka Miner's Index(EMI) fares, I don't think it will be pretty.

On a more positive note, World Steel predicts that global steel consumption will hit a record 1.44 billion metric tons in 2012. This year will be no slouch either with consumption expected to hit 1.36 billion metric tons, a 5.9% increase. This should be good for the molybdenum market on the demand side; moly is an important alloy in the production of high-grade steels (see Molybdenum Weekly Roundup below).

For the precious metal folks it was a pretty good morning too. COMEX gold and silver took off like a rocket at 09:10 ET; gold scored a new high at $1498.0/oz, silver just missed an earlier high set Sunday at $43.38/oz. Predictably, the closely watched gold/silver ratio favored silver as it made new multi-decade lows in mid-34 territory. Presently the ratio is 34.553 with COMEX gold trading at $1489.6/oz and silver at $43.111/oz.

NYMEX oil future contracts have rolled forward so the Report will now track June and a two-month look-ahead for August (see Daily Oil Watch below). This puts us smack-dab in the middle of summer with 100+/bbl oil. Presently the June contract is sitting at $108.56/bbl.

Be sure to checkout our new "Latest Nevada Fuel Prices" link. These are reported numbers so you may find higher and lower prices as you drive around the hinterland. On average Nevada regular gas is $3.885/gal compared to the national average of $3.808/gal (these update quite often). Here are the latest low and high price:

1740 Mountain City Hwy & Aspen Way, Elko $3.67/gal

217 Kingsbury Grade near US-50, Stateline $4.49/gal

Let's wrap up with an update of our record book for the big three metals together with NYMEX and ICE Brent crude:

COMEX Gold $1,498.0/oz 09:10 ET 04/18/2011, June contract most active (new)
COMEX Silver $43.380/oz 23:30 ET 04/17/2011, May contract most active (new)
COMEX Copper $4.6375/lb 06:15 ET 02/04/2011, March contract most active
NYMEX WTI Crude $113.46/bbl 18:00 ET, 04/10/2011, May contract most active
ICE Brent crude $126.47/bbl 016:45 ET 04/08/2011, June contract most active

Eureka Miner's Index (EMI)

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 385.68, down from from Friday's close at 459.96 and falling below the 1-month moving average of 450.16. The EMI continues to be down from the high set on January 4th, it set a new 2011 low on March 15th. A positive trend from the bottom may now be jeopardy if we do not rebound above the 1-month average in the next several days.

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 below-par at 70.77 up from Friday's close of 70.19 and the 3rd day above the 1-month moving average which is now 69.84. Gold is presently gaining value. The GVI high for 2011 is 78.35. Today's Value Adjusted Gold Price (VAGP) is $1,758.7/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 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.

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.

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

Latest Nevada Fuel Prices

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 (MENA). It is now above $120/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 the region.

Here are the key front-month contracts as of this morning:

NYMEX light sweet crude $108.56
ICE North Sea Brent crude $121.75
Spread (ICE- NYMEX) = $13.19 (Last Friday $14.43)

Here are the August contracts* with a narrower spread:

NYMEX light sweet crude $109.49
ICE North Sea Brent crude $121.12
Spread (ICE- NYMEX) = $11.63 (Last Friday $12.97)

* NYMEX futures contracts have rolled forward, we now show June & August for a 2-month look-ahead

Prices are off their crisis highs but we still have $120+ Brent and $100+ NYMEX in August favoring higher oil prices throughout 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 +0.7556 (1-month) +0.9211 (3-month)
Cu/Au correlation +0.0736 (1-month) -0.2916 (3-month)
Cu/Oil correlation +0.1532 (1-month) -0.4061 (3-month)

Here are the numbers from the last roundup (4/08/2011):

Oil/Au correlation +0.8887 (1-month) +0.9170 (3-month)
Cu/Au correlation +0.6883 (1-month) -0.2307 (3-month)
Cu/Oil correlation +0.6416 (1-month) -0.3706 (3-month)

We continue to have more positive than negative correlations but there has been significant weakening in copper versus gold. Oil and gold continue to be in the corner pocket of high positive correlation. Copper versus gold is trending back to its recent inversion (i.e. both one-month & three-month value correlations are negative). Copper versus oil is experiencing a reverse trend in correlation too. The metals & miners tend to do best when all correlations are positive.

According to my April models (see bottom of blog page): oil is presently undervalued with respect to gold by -1.04-standard deviations and copper is undervalued by -0.78-standard deviations. Copper is presently undervalued with respect to oil by -0.73-standard deviations.

There are three things to note: 1) gold has been undervalued with respect to these three commodities for some time in terms of their ratios (see GVI and also commodity ratio discussions) 2) a flip-flop with these commodities now being undervalued with respect to gold indicates a more recent trend with respect to the 3-month regression models and, 3) all the standard deviations are less than 2-sigma indicating the models are pretty good for April. Stay tuned, there's something in the works here.

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 for a possible return trip back to the "-,-" inversion region is a decidedly bearish development.

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 is now trending back up from the March 15th low but today's dip may put this recovery in peril.

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 14.352 bbl/oz
variation > 3.0% limit at 6.00% (1-standard deviation/mean)

Oil:Copper ratio

mean 22.46 lbs/bbl
variation > 3.0% limit at 10.00% (1-standard deviation/mean)

Gold:Copper ratio

mean 320.52 lbs/oz
variation > 3.0% limit at 4.83% (1-standard deviation/mean)

Weekly Molybdenum Roundup

Spot prices for molybdenum oxide are straddling $17/lb territory with 16.85/lb out West and $17.12/lb in Europe. I've bet that euro moly oxide breaks $17.20/lb by May Day. Western and Euro moly spot prices remain in a moderate 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 at $17.24/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. I did believe we could see much higher prices this year although the turmoil in the Arab World turmoil and the crisis in Japan have put a damper on that expectation. 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 $16.85/lb (FeMo65, the price tracked by Infomine - see the side bar graph in the lower right column)

Moly Oxide, Europe (Mo Drummed Molydbic Oxide EU) $17.12/lb (the price reported in the Metals Bulletin)

LME Futures Contracts

LME cash seller is at $37,650/metric ton $17.08/lb

3-Month (Buyer) $37,000/metric ton $16.78/lb
3-Month (Seller) $38,000/metric ton $17.24/lb

15-Month (Buyer) $38,250/metric ton $17.35/lb
15-Month (Seller) $39,250/metric ton $17.80/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 back in a rough patch; The VIX or "fear index" is below 25; bellwether Freeport-McMoRan (FCX) is now in 7th day of price decline moving below its 150-day average and approaching its 200-day average of $47.94 (our new warning level, 04/15 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/bbl

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 $1.66 in early trading at $108.56 (June contract, most active); Gold is up $3.6 to $1489.6 (June contract, most active); Silver is up $0.539 to $43.111 (May contract, most active); Copper is down $0.0395 to $4.2180 (May contract, most active)

Western Molybdenum Oxide is $16.85; European Molybdenum Oxide is $17.12; LME moly 3-month seller's contract is $17.24, LME cash seller is $17.08

Stock Market Morning Update

The DOW is down 197.68 points to 12,144.22; the S&P 500 is down 19.37 at 1,300.31

Miners are mixed:

Barrick (ABX) $53.56 up 0.43%
Newmont (NEM) $58.26 up 0.88%
US Gold (UXG) $9.39 down 0.21%
General Moly (Eureka Moly, LLC) (GMO) $5.26 down 0.19%
Thompson Creek (TC) $11.87 down 0.50%
Freeport-McMoRan (FCX) $51.20 up 0.06% (a bellwether mining stock spanning copper, gold & molybdenum)

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

ArcelorMittal (MT) $34.08 down 2.52% - global steel producer
POSCO (PKX) $108.75 down 3.71% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is is down 0.58% at $1,924,836.99 (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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