"The history of Eureka lies in its future." - Lambert Molinelli, 1878

DISCLOSURE

The author/editor of the Eureka Miner owns common shares of local mining stocks, General Moly (GMO), McEwen Ming (MUX) 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 25, 2011

Gold $1519; Silver $49.8 - Metals & Miners Weekly Roundup


Morning Miners!

It is 5:47 AM. Happy ANZAC Day, here's a cup to salute the folks down under. This a national day of remembrance in Australia and New Zealand (note 2). More about Australia in a moment but first here are some new records...

Oil & Metals Outlook

Another good Monday for the precious metal folks. COMEX silver gaped up to nearly $50/oz hitting $49.820/oz at 01:10 ET this morning; gold scored a new high at $1519.20/oz at 07:00 ET. The closely watched gold/silver ratio favored silver again as it made another multi-decade low in low-31 territory. Presently the ratio is 31.35 with COMEX gold trading at $1513.0/oz and silver at $48.260/oz.

NYMEX oil future contracts have rolled forward so the Report now tracks 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 110+/bbl oil. Presently the June contract is sitting at a disturbing $113.21/bbl; August is $113.98/bbl. This morning NYMEX oil beat its April 10th record by 2-cents to score $113.48/bbl for the most active contract.

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 $3.894/gal compared to the national average of $3.842/gal (these update quite often). Here are the latest low and high reported price:

Vegas Express
4421 E Bonanza Rd & N Lamb Blvd, Las Vegas East $3.71/gal

Chevron
898 Tahoe Blvd & Village Blvd, Incline Village $4.37/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 $1,519.20/oz 07:00 ET 04/25/2011, June contract most active (new)
COMEX Silver $49.820/oz 01:00 ET 04/25/2011, May contract most active (new)
COMEX Copper $4.6375/lb 06:15 ET 02/04/2011, March contract most active
NYMEX WTI Crude $113.48/bbl 09:00 ET, 04/25/2011, June contract most active (new)
ICE Brent crude $126.47/bbl 016:45 ET 04/08/2011, June contract most active

A Note to Eric - Australian Dollar et al


Eric, a good friend of this Report, asked the ole Colonel this weekend about the Australian dollar compared to our own greenback. My reply covers many of the themes we've discussed in 2011 and my outlook for the U.S. dollar, gold and silver. Here is the note to Eric in its entirety:


Eric,

"Should we buy Australian dollars?"

This is a really good question.

The aussie dollar like the Canadian loonie are called commodity currencies because both Australia and Canada have economies that are heavily reliant on natural resources (like Eureka County!). As long as commodities are on a tear, which has been the case for some time, they generally will fare better than the U.S. dollar.

There is another way to look at this same picture.

June 7th, 2010 was one of the worst days for the mining sector last year. It occurred when the DOW fell through the so-called "flash crash" low that happened a month earlier when computers hijacked the exchanges. Since that time the U.S. dollar has lost a disturbing 17% of value when compared to a basket of other world currencies (as measured by the US dollar index - see note 3).

I find it even more amazing that although gold price [in U.S. dollars] has soared, gold value compared to several key commodities has gone down the mineshaft. Since early last June an ounce of gold buys 23% fewer barrels of oil, 24% fewer pounds of copper and a shocking 48% fewer ounces of silver.

This won't go on forever and that is why I would caution anyone from jumping into the aussie or the loonie at this late date. I believe that gold is the sun of the commodity solar system, not just another planet. Commodity prices will be pulled back into closer orbit with gold eventually; it has worked that way for more than 5,000 years. As commodities lose value with respect to gold, the aussie and loonie will suffer.

Expecting the US dollar index to continue to fall is a bet that Europe and Japan are going to do better than the poor ole U.S.A. because the euro and yen dominate the index (more than 70%). A startling 99% of investors are U.S. greenback "bearish." When a trade gets this lopsided I like to join the "1% club" just to be an ornery old cuss.

Bottom line: if you buy gold, buy some US dollar index too (Powershares DB US Dollar index bullish fund, UUP). This is a good way to hedge your bet (especially with gold above $1,500/oz). I'd stay clear of commodity sensitive currencies. If you are brave, buy silver which has fared so much better than gold - but be careful, it too will return to the golden sun someday.

Sunday thoughts for a good question.

Cheers - CP


Please do your own head scratching before diving into currencies and precious metals in these crazy markets, pardner.

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 566.88, down from from Thursday's close at 597.38 and above the 1-month moving average of 483.78. 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 has been re-established.

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 68.39 down from Thursday's close of 68.46 and below the 1-month moving average which is now 69.56. Gold is presently losing value. The GVI high for 2011 is 78.35. Today's Value Adjusted Gold Price (VAGP) is $1,848.6/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 Thursday'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 $113.21
ICE North Sea Brent crude $124.53
Spread (ICE- NYMEX) = $11.32 (Last Thursday $12.14)

Here are the August contracts* with a narrower spread:

NYMEX light sweet crude $113.98
ICE North Sea Brent crude $123.82
Spread (ICE- NYMEX) = $9.84 (Last Thursday $11.11)

* 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 $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.

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 +0.7622 (1-month) +0.9138 (3-month)
Cu/Au correlation -0.0334 (1-month) -0.4084 (3-month)
Cu/Oil correlation +0.2680 (1-month) -0.4978 (3-month)

Here are the numbers from the last roundup (4/15/2011):

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)

We now have equal positive and negative correlations with continued weakening in copper versus gold. Oil and gold remain in the corner pocket of high positive correlation. Copper versus gold has re-entered the inversion quadrant (i.e. both one-month & three-month correlations are negative). Copper versus oil is has an increasing negative 3-month but improving 1-month positive correlation. 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 -0.85-standard deviations and copper is overvalued by +0.58-standard deviations. Copper is presently overvalued with respect to oil by +0.80-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 for a return trip back to the "-,-" inversion region is a decidedly bearish development although there is a trend back to "+,-."

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.

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

Oil:Copper ratio

mean 22.78 lbs/bbl
variation > 3.0% limit at 10.2% (1-standard deviation/mean)

Gold:Copper ratio

mean 322.9 lbs/oz
variation > 3.0% limit at 5.19% (1-standard deviation/mean)

Weekly Molybdenum Roundup

Spot prices for molybdenum oxide are still straddling $17/lb territory with 16.96/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 $17.46/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 $16.96/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 $38,200/metric ton $17.32/lb

3-Month (Buyer) $37,000/metric ton $16.78/lb
3-Month (Seller) $38,500/metric ton $17.46/lb

15-Month (Buyer) $38,450/metric ton $17.42/lb
15-Month (Seller) $39,450/metric ton $17.89/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 in a rough patch with some improving road ahead; The VIX or "fear index" is below 25; bellwether Freeport-McMoRan (FCX) is below its 100-day average but 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 VERY RED light is turned on our Fuel Gauge with oil above $110/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 up $0.92 in early trading at $113.21 (June contract, most active); Gold is up $9.2 to $1513.0 (June contract, most active); Silver is up $2.201 to $48.260 (May contract, most active); Copper is down $0.0370 to $4.3630 (May contract, most active)

Western Molybdenum Oxide is $16.96; European Molybdenum Oxide is $17.12; LME moly 3-month seller's contract is $17.46, LME cash seller is $17.32

Stock Market Morning Update

The DOW is down 20.21 points to 12,485.78; the S&P 500 is down 0.99 at 1,336.39

Miners are mixed:

Barrick (ABX) $53.64 down 3.58%
Newmont (NEM) $59.35 up 0.20%
US Gold (UXG) $9.53 up 0.21%
General Moly (Eureka Moly, LLC) (GMO) $5.23 down 0.19%
Thompson Creek (TC) $12.32 up 0.33%
Freeport-McMoRan (FCX) $55.63 up 1.44% (a bellwether mining stock spanning copper, gold & molybdenum)

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

ArcelorMittal (MT) $36.52 up 0.05% - global steel producer
POSCO (PKX) $109.17 down 1.76% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is is up 0.14% at $1,990,374.00 (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 (Wiki).

Note 2 - Anzac Day is a national day of remembrance in Australia and New Zealand, and is commemorated by both countries on 25 April every year to honour the members of the Australian and New Zealand Army Corps (ANZAC) who fought at Gallipoli in Turkey during World War One. It now more broadly commemorates all those who died and served in military operations for their countries. Anzac Day is also observed in the Cook Islands, Niue, and Tonga. It is no longer observed as a national holiday in Samoa (Wiki).

Note 3 - The Powershares DB US Dollar index bullish fund (UUP) which tracks the U.S. Dollar Index (.DXY) is down 17.8% from June 7th 2010. The UUP is down 10.9% over a one year period (closing price, 4/21/2011).


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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