"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.

Tuesday, May 10, 2011

The Colonel Returns - Price of Gas, General Moly (GMO) & Gold's Surprise



Morning Miners!

It is 6:14 AM - good to be off the road and back in Eureka! There is a skiff of snow on the ground and Ruby T is making a new pot of coffee. Grab a cup and let's see what's been happening while I've been gone...

Price of Gas

As the headline photo suggests, $4.15/gal is a lot to pay for regular in Eureka but it's more expensive elsewhere, pardner. The Tonopah Chevron gets the dubious distinction of being the highest reported price in our state at $4.39/gal but is a quite a bit cheaper than Lone Pine, California where I paid north of $4.50. If you haven't done it already, checkout our link to the latest Nevada fuel prices (gasoline & diesel) which is part of the Daily Oil Watch (see below). The national average is presently $3.927/gal; the Nevada average is $3.896/gal. If you want to brag on getting the cheapest gas, hop in the truck and drive to Sam's Club in North Las Vegas - $3.72/gal.

General Moly (GMO) Hearings

Of course, the big news today for local mining will be the outcome of 2-day hearings in Carson City on the General Moly's request over water rights for its planned Mt. Hope molybdenum mine (the State Engineer's Office has up to 240 days to rule on General Moly's applications; GMO expects a decision later this year).

Today is the extra inning requested by Jason Wilson of the State Engineer's Office. The protestants wanted ample opportunity to question GMO on their latest supplied information. Mining editor Adella Harding of the Elko Daily Free Press wrote a good background article on the hearings last week if you're just getting caught up:

State plans extra hearing day on Mt. Hope (ADELLA HARDING Mining Editor, Elko daily Free Press, May 2, 2011)

The ole Colonel will update you on information I receive from the hearings, give me a holler if you have any interesting tidbits.

Gold's Surprise

It has been a rough toughie for miners while I've been away. General Moly dropped below $5/share to plumb $4.22 before heading back up to mid-$4 today. This report's Eureka Miner's Index(EMI) pretty much tells the story for the factors that influence mining in Eureka County. Here is my latest chart before this morning's market open (a larger and more readable plot can be found at the bottom of this blog page):



The one-month moving average (blue) is trending negative (blue arrow) but we are still above the March 15th low. If the miner's can crawl back to the average and avoid a new low, there is hope for a late spring/early summer rally.

There is one positive aspect to all the the recent carnage in the metals & miners sector - gold is steadily recovering value. Our Gold Value Index (GVI) tracks the relative value of gold in relation to oil, copper and silver independent of currency. As we have commented in the past, the GVI has been in steady decline since last June even though gold prices (in U.S. dollars) have risen above $1500/oz. In simple terms, an ounce of gold buys less fuel, fewer pounds of copper and a lot fewer ounces of silver than a year ago. That is changing now as the GVI has trended back toward last November levels (dashed line) which represent more typical historic norms for these key commodities. Here is the latest chart of the Gold Value Index (a larger GVI chart can be found together with the EMI plot below):



So what Colonel? I beieve that gold is the sun in the commodity solar system. Over the last 11 months some of the planets like copper and silver have moved further and further away from the golden sun's gravitational pull. They have reached long elliptical orbits and behaved seemingly independent of the master precious metal. Now oil, copper and silver are all falling back to the solar center at a fairly rapid clip. Here is the increase in gold's relative value in relation to its lowest point for all three (as of yesterday):

Oil: gold value up 13.8% since 4/8/11 low
Copper: gold value up 27.6% since 2/3/11 low
Silver: gold value up 29.0% since 4/25/11 low

Overall GVI up 14.0% since 4/11/11 low

The return of commodity prices to more well behaved orbits about the sun is not bad news, buckaroos. The law of gold's gravitational pull on commodities has been around for more than 5,000 years.



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 341.10, up from yesterday's 308.58 and below the 1-month moving average of 457.23. The EMI continues to be down from the high set on January 4th; it set a new 2011 low on March 15th. The 1-month average has established a troubling negative trend although we are still above the March low.

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 76.87, down from yesterday's 77.18 but above its 1-month average of 71.45. The gold-gaining-value trend is intact. Today's Value Adjusted Gold Price (VAGP) is $1,641.1/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 $110/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 $101.80
ICE North Sea Brent crude $115.46
Spread (ICE- NYMEX) = $13.66

Here are the August contracts* with a narrower spread:

NYMEX light sweet crude $102.84
ICE North Sea Brent crude $114.59
Spread (ICE- NYMEX) = $11.75

* 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 $110+ 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.

Eureka Outlook Dashboard

4-WD is ON - The miners are on rough roads; The VIX or "fear index" is below 25; bellwether Freeport-McMoRan (FCX) is struggling to stay above its 200-day moving average of $49.62 (our new warning level, 05/10 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 The Federal Reserve will phase out buying Treasurys (aka QE2) but maintain low interest rates for now

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 down $0.75 in early trading at $101.80 (June contract, most active); Gold is up $6.6 to $1509.8 (June contract, most active); Silver is up $0.804to $37.920 (July contract, most active); Copper is up $0.0045 at $4.0210 (July contract, most active)

Western Molybdenum Oxide is $16.65; European Molybdenum Oxide is $17.02; LME cash seller is $17.10, LME moly 3-month seller's contract is $17.24
Stock Market Morning Update

The DOW is up 52.64 points to 12,737.32; the S&P 500 is up 7.13 at 1,353.42

Miners are mixed:

Barrick (ABX) $47.74 up 0.15%
Newmont (NEM) $54.34 down 0.62%
US Gold (UXG) $7.80 down 0.13%
General Moly (Eureka Moly, LLC) (GMO) $4.44 down 1.33%
Thompson Creek (TC) $10.89 up 2.06%
Freeport-McMoRan (FCX) $51.59 down 0.56% (a bellwether mining stock spanning copper, gold & molybdenum)

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

ArcelorMittal (MT) $36.10 up 1.15% - global steel producer
POSCO (PKX) $110.29 up 0.14% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is up 0.03% at $1,798,596.22(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)

Headline & inset photograph from CNN live coverage of the Royal Wedding

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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