"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 4, 2011

Oil Breaks $108; Silver New Record - Metals & Miners Weekly Roundup

Morning Miners!

It is 5:52 AM. It's a busy week already, records busting out all over. Grab a cup of Monday go-juice and let's get to work...

Oil & Metals Outlook

The ole Colonel always enjoys a new commodity price high...except when it has to do with oil. This morning was a double-bummer with both NYMEX light crude and Brent crude posting new numbers on a further deteriorating outlook for the the crisis in North Africa and the Middle East. In the wee hours, NYMEX oil almost made $109/bbl pegging $108.78/bbl. Brent followed in the early morning nearly touching $120/bbl at $119.95/bbl. That's too close for comfort.

There is a growing consensus that global growth and our own domestic recovery will run into serious headwinds if we enter the $110-$120/bbl pasture for any extended period. $4+/gal gasoline is already here ($4.29/gal at Shell, I-80 Exit 13, Reno, NV; $3.814/gal Nevada average), watch out for $5+/gal this summer if we don't start seeing some improving conditions in the oil-rich Arab world (see the Daily Oil Watch below for more details).

To lift our spirits a bit, COMEX silver set a new 31-year high at $38.620/oz. COMEX gold is presently trading at $1,436.2/oz and silver has pulled back a tad to $38.545/oz for a multi-decade low gold/silver ratio of 37.26. Today's price action drops the relative value of gold in relation to oil, copper and silver to a new 10-month low. We track this key commodity comparison with the Report's recently introduced Gold Value Index (GVI) (see below).

Let's update 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 $38.620/oz 09:00 ET 04/04/2011, May contract most active (new)
COMEX Copper $4.6375/lb 06:15 ET 02/04/2011, March contract most active
NYMEX WTI Crude $108.78/bbl 04:30 ET, 04/04/2011, May contract most active
ICE Brent crude $119.95/bbl 09:10 ET 04/04/2011, May contract most active

Compared to its record breaking pace in 2010 and into early February of 2011, copper struggled most of last quarter. It is up today at $4.2890/lb. Here is an excellent Bloomberg overview on the red metal outlook with two videos:

Copper Seen Rising 17% to Record as Shortages Overcome Weaker China Demand (Maria Kolesnikova and Agnieszka Troszkiewicz, Bloomberg News, Apr 4, 2011 3:50 AM PT)

You may find the video with Richard Adkerson, chief executive officer of Freeport-McMoRan Copper & Gold Inc., to be particularly interesting as he discusses the copper market and the company's business strategy. The Bloomberg interview is from the BMO Capital Markets Global Metals & Mining Conference in Hollywood, Florida.

Mr. Adkerson is one of the world's best mining bosses and when he speaks, the ole Colonel listens. The Report pays attention to copper not only because we have the Qudra FNX operated Robinson mine in nearby Ely, but copper has proved to be a reliable proxy for global growth. As copper goes, so go the metals & miners in my world.

Finally, European moly oxide gained a little last week after falling below its lower tend-line established since last July. At $16.95/lb it is nearly back to $17 territory with its western cousin. I'm looking to see euro moly break $17.20/lb this month (see Weekly Molybdenum Roundup below). This is an important number to watch because the European steel makers us a lot of molybdenum in their high-grade steels.

Eureka Miner's Index (EMI)

The broader markets are now open and it looks like copper giant Freeport-McMoRan (FCX) is up above its 50-day and 100-day moving averages. The miners are in rally mode, pardner.

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 478.43, up from from Friday's close at 448.43 and above the 1-month moving average of 374.04. The EMI continues to be down from the high set on January 4th, it set a new 2011 low on March 15th. A trend reversal may be in the works.

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 69.37 down from Friday's close of 69.57 and a a new low for 2011. The 1-month moving average is 70.86 and the GVI high for 2011 is 78.35. Today's Value Adjusted Gold Price (VAGP) is $1,729.93/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

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 $108.00
ICE North Sea Brent crude $119.79
Spread (ICE- NYMEX) = $11.79 (Last Friday $10.50)

Here are the July contracts* with a narrower spread:

NYMEX light sweet crude $109.04
ICE North Sea Brent crude $119.09
Spread (ICE- NYMEX) = $10.05 (Last Friday $9.11)

* (the most active front-month contracts are now May so we moved from June to July contracts for a 2-month look-ahead).

Prices are near their crisis highs, we have $110+ Brent and $100+ 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.

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 +0.8022 (1-month) +0.8891 (3-month)
Cu/Au correlation +0.4753 (1-month) -0.2640 (3-month)
Cu/Oil correlation +0.4150 (1-month) -0.3915 (3-month)

Here are the numbers from the last roundup (3/28/2011):

Oil/Au correlation +0.7171 (1-month) +0.8215 (3-month)
Cu/Au correlation +0.4056 (1-month) -0.1971 (3-month)
Cu/Oil correlation +0.1054 (1-month) -0.3291 (3-month)

We now have more positive than negative correlations. Oil and gold continue to move in a strong positive direction. Copper versus gold & copper versus oil have both stepped outside their inversions (i.e. both one-month & three-month value correlations are negative) as their 1-month correlations trend more positive. The metals & miners tend to do best when all correlations are positive.

According to my March models (see bottom of blog page): oil is presently overvalued with respect to gold by +5.57-standard deviations and copper is overvalued by +0.61-standard deviations. Copper is presently undervalued with respect to oil by -1.29-standard deviations. April models will be updated and available next Monday.

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 into the "-,-" inversion region was a bearish development but its continuing trend into the "+,- region is encouraging. Stay tuned.

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 remains in correction except Freeport-McMoRan may be showing some new signs of life.

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 14.643 bbl/oz
variation > 3.0% limit at 5.49% (1-standard deviation/mean)

Oil:Copper ratio

mean 21.76 lbs/bbl
variation > 3.0% limit at 9.12% (1-standard deviation/mean)

Gold:Copper ratio

mean 316.91 lbs/oz
variation > 3.0% limit at 4.24% (1-standard deviation/mean)

Weekly Molybdenum Roundup

Spot prices for molybdenum oxide remain in $17/lb territory out West but are below at $16.95/lb in Europe. The trend for the latter is again upward; I've bet that euro moly oxide breaks $17.20/lb by May Day. The previous week it broke below its lower trend-line established since July 2010. Western and Euro moly spot prices are now in a very light 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 is 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 Arab World turmoil and Japan crisis 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 $17.00/lb (the price tracked by Base Metals on the General Moly Website)

Moly Oxide, Europe (Mo Drummed Molydbic Oxide EU) $16.95/lb (the price reported in the Metals Bulletin)

LME Futures Contracts

LME cash seller is at $38,050/metric ton $17.26/lb

3-Month (Buyer) $36,500/metric ton $16.56/lb
3-Month (Seller) $38,500/metric ton $17.46/lb

15-Month (Buyer) $38,150/metric ton $17.30/lb
15-Month (Seller) $39,150/metric ton $17.76/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 still in a rough patch but there are some signs of improvement; The VIX or "fear index" is below 25; bellwether Freeport-McMoRan (FCX) is now above both 50-day and 100-day moving averages and 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

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

Commodity Market Morning Update

NYMEX/COMEX: Oil is up $0.06 in early trading at $108.00 (May contract, most active); Gold is up $7.3 to $1436.2 (April contract, most active); Silver is up $0.813 to $38.545 (May contract, most active); Copper is up $0.0305 to $4.2890 (May contract, most active)

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

Stock Market Morning Update

The DOW is up 10.11 points to 12,386.90; the S&P 500 is up 1.07 at 1,333.48

Miners are in a good mood today:

Barrick (ABX) $51.96 up 1.35%
Newmont (NEM) $55.29 up 1.69%
US Gold (UXG) $8.92 up 1.94%
General Moly (Eureka Moly, LLC) (GMO) $5.39 up 1.70%
Thompson Creek (TC) $12.84 up 2.07%
Freeport-McMoRan (FCX) $56.02 up 1.71% (a bellwether mining stock spanning copper, gold & molybdenum)

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

ArcelorMittal (MT) $36.80 up 1.43% - global steel producer
POSCO (PKX) $116.71 up 1.12% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is is up 1.42% at $1,931,588.61 (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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