Gold $1506; Silver $50 Soon?; Freeport (FCX) Rocks

I went down there with my hat caved in,
Doo-da, doo-da
I came back home with a pocket full of tin
Oh, de doo-da day - "Camptown Races", Stephen Foster


Wōdnesdæg
Morning Miners!

It is 5:49 AM. Have a hot cup of Wednesday Hump and put on these ear protectors. Old Miner Woden has been singing "Camptown races" all morning long, let's see why he is so dad-blame happy...

Gold $1506; Silver $50 Soon?

The Report is getting easier to write everyday. All the ole Colonel needs to do is check on the new record for gold and silver and then find some evidence that the miners are going back up the mineshaft after a bruising start for 2011. This morning is real easy on both accounts - we'll get to the good news for miners in a minute.

COMEX gold broke the magical $1500/oz yesterday and then touched $1506.2/oz at 05:40 ET. It is presently trading at $1501.2/oz. My December prediction that COMEX gold would break $1570/oz before July the Fourth is on track, pardner.

COMEX silver followed gold up the price trail to score a new 31-year record of $44.825/oz two hours and twenty minutes later. We're getting close enough to the 1980 silver record to reasonably ask when silver will break $50/oz. COMEX silver is now at $44.690/oz.

There is a funny thing about markets, they like to return to old highs and old lows, Sometimes prices go higher (or lower) than the old watermarks but more often then not, they return to their former place of glory (or disgrace). The flash crash last year was a good example of the latter case. Although some viewed the sudden computer-driven drop in the DOW to be just an anomaly, the DOW returned to that low a month later on June 7th - arguably the worst day for the mining sector in 2010 (see note 2).

In 1980 silver prices topped out at $49.45/oz during the Hunt Brother's shenanigans. That's only $4.63 from this morning's new high - $50 bucks here we come. But when?

I asked my April commodity models and their answer was, "silver will be $50.0/oz when gold is $1590.3/oz." My models are pretty cut n' dry, not much joking around with these guys.

Let's look at it from a different viewpoint. The gold/silver ratio has been in steady, near straight-line decline, since early February. It sets new multi-decade lows almost every morning, presently it is at 33.6 (i.e., $1501.2/$44.690). I extended this trendline in time to discover that the gold/silver ratio should hit 30 territory on May 24th. If you believe that gold will still be in $1500+/oz pasture in May, $50+ silver should be a slam dunk too (i.e. $1500/30 = $50).

Of course, markets also teach us that the best charts and analysis are often proved worthless when the unforeseen blows apart smug predictions. CNBC bond market commentator Rick Santelli puts it this way, "There are a lot of ships at the bottom of the ocean and they all have chart rooms."

I think this is still worth a new beer bet:

COMEX silver will break $50/oz before the Fourth of July 2011

You can view my other bets for the year in the lower right column of this blog page. Belly up to the bar, pardner.

Oh, let's not forget to update of our record book for the big three metals together with NYMEX and ICE Brent crude:

COMEX Gold $1,506.2/oz 05:40 ET 04/20/2011, June contract most active (new)
COMEX Silver $44.825/oz 08:20 ET 04/20/2011, 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

Freeport-McMoRan (FCX) Rocks

In yesterday's Report, the ole Colonel said, "With red metal prices north of $4/lb, a key miner like Freeport with production costs of around a buck-a-pound is going to do just fine, pardner." The copper giant just reported earnings and they blew expectations away. Here is the FCX press release and a follow-up Reuters article this morning:

First-Quarter 2011 Results, Freeport-McMoRan Copper & Gold Inc. Reports (Press Release)

Freeport-McMoRan results beat Street; stock up (Reuters,Wed Apr 20, 2011 12:29pm GMT)

Their net cash costs are estimated to be $1.04/lb for 2011 and their earnings were a staggering $1.5 billion, or $1.57 per share. Last year they clocked is $1.00/share for the same period. Freeport was so ebullient they decided to give all the share holders an extra $0.50/share dividend.

Freeport is important to Eureka because it is often considered a bellwether miner for the entire mining sector. FCX is one of the twelve stocks in the Eureka Miner's Million D ollar Grubstake Portfolio which got a nice 1.83% bounce this morning to $1,957,675.


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 547.99, up from yesterday's 423.21 but and now above the 1-month moving average of 464.03. 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 intact if we can stay above the 1-month average.

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 70.16, down from yesterday's 71.37 but still north of the 2011 low of 67.68. The 1-month moving average is 69.80. Today's Value Adjusted Gold Price (VAGP) is $1,789.9/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

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 $109.41
ICE North Sea Brent crude $122.30
Spread (ICE- NYMEX) = $12.89 (Yesterday's $12.75)

Here are the August contracts* with a narrower spread:

NYMEX light sweet crude $110.06
ICE North Sea Brent crude $121.57
Spread (ICE- NYMEX) = $11.51 (Yesterday's $11.44)

* 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 now have $120+ Brent and $110+ 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.

Eureka Outlook Dashboard

4-WD is ON - The miners may on improving rough roads; The VIX or "fear index" is below 25; bellwether Freeport-McMoRan (FCX) jumped above its 50-day and 150-day moving averages today and is comfortably above 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

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, Proposal could change net proceeds tax, 'You get to deduct WHAT???' Nevada lawmakers ask gold miners

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

Commodity Market Morning Update

NYMEX/COMEX: Oil is up $1.13 in early trading at $109.41 (June contract, most active); Gold is up $6.1 to $1501.2 (June contract, most active); Silver is up $0.777 to $44.690 (May contract, most active); Copper is up $0.0630 to $4.2925 (May contract, most active)

Western Molybdenum Oxide is $17.25; European Molybdenum Oxide is $17.12; LME cash seller is $17.08, LME moly 3-month seller's contract is $17.35

Stock Market Morning Update

The DOW is up 160.41 points to 12,427.16; the S&P 500 is up 15.37 at 1,327.66

Miners are on fire:

Barrick (ABX) $54.78 up 1.01%
Newmont (NEM) $59.70 up 1.83%
US Gold (UXG) $9.31 up 1.64%
General Moly (Eureka Moly, LLC) (GMO) $5.18 up 1.77%
Thompson Creek (TC) $12.06 up 3.25%
Freeport-McMoRan (FCX) $53.93 up 4.27% (a bellwether mining stock spanning copper, gold & molybdenum)

The Steels are pouring molten metal (a "tell" for General Moly & Thompson Creek):

ArcelorMittal (MT) $35.93 up 2.77% - global steel producer
POSCO (PKX) $113.80 up 2.99% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is is up 1.83% at $1,957,675.01 (what's this?).

Cheers,

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)

Mote 2 - The DOW fell through the flash crash low of 9869.62 to close at 9816.49 on June 7, 2010. Miners were in the tank.

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