Red Metal Rise - Dr. Jekyll and Mr. Hyde; General Moly (GMO) Breaks $5

Morning Miners!

It is 5:44 AM. Have a well deserved cup of Raine's delicious Red Label TGIF coffee. This Friday and last Monday morning are about as different as Dr. Jekyll and Mr. Hyde in terms of weather and markets...

Red Metal Rise - Dr. Jekyll and Mr. Hyde


The following is a bit technical - the short version is that it looks like the metals & miners have turned an important corner to the upside. Have a great weekend.

If you love numbers here's the longer version that explains why:

I'll take sunshine over lousy weather any day and that's not the only thing different about today compared to the beginning of the week. On Monday our trusty Eureka Miner's Index(EMI) plumbed a new low for the year. This was scary because the market sentiment towards metals & miners was cold and turning colder. The EMI gives us the market temperature for the factors that have the greatest impact on mining in Eureka County and our thermometer was falling fast. COMEX copper was below $4/lb and bellwether miner Freeport-McMoran (FCX) and General Moly (GMO) were both headed for their 400-day moving averages (FCX intraday low $46.67 versus $43.89 400-day; GMO $3.95 versus $3.89). Ouch.

There was something in Monday's data that did argue against impending market Armageddon. Copper, although down in price, was showing correlation strength with oil and gold. This report tracks copper because it has proven to be a reliable gauge of global growth expectations and the mining sector tends to do best when copper is positively correlated with gold and oil.

Let's look at some numbers. From a correlation point of view, copper started the month of May decidedly bearish with very negative 3-month correlations with these two important commodities:

5/3/2011

copper/gold -0.5568 (3-month)
copper/oil -0.6130 (3-month)

By mid-month copper/oil correlation had crossed into positive territory on a 3-month basis and copper/gold on a 1-month. By Horrible Monday of this week correlations were still improving from early May:

5/23/2011

copper/gold -0.4682(3-month)
copper/oil +0.3399 (3-month)

And today, 5/27...

copper/gold -0.4605(3-month)
copper/oil +0.5064 (3-month)

Although the copper/oil transformation from negative to positive is dramatic from early May to now, the copper/gold is still struggling in negative territory. Let's look at the 1-month correlations as of today:

Today, 5/27

copper/gold +0.7470 (1-month)
copper/oil +0.7989 (1-month)

Ah, that's much better. If this trend continues, the 3-month copper/gold will be in positive pasture soon. Everybody positive (1- and 3-month) is definitely a bullish sign for mining.

The broader markets are now open and so far agree with our theory. COMEX copper is trading at a much healthier $4.1785/lb compared to Horrible Monday's sub-$4 and copper giant Freeport-McMoRan has sprung above its 200-day average at $51.60 up 12% from Monday. The EMI has jumped above its 1-month moving average (see below) to hopefully leave the 5/23 year low in the dust. COMEX gold is up too at $1,528/oz and NYMEX oil has ticked up 50-cents to $100.75/bbl. Even though I don't like high oil prices; oil, gold and copper all moving in the same direction is a good sign for miners - that's called positive correlation, pardner.

General Moly (GMO) Breaks $5

After a drop to $3.83/share on May 17th, General Moly stock has broken $5 today in early trading at $5.01 - a 30.8% move from the May low. A one-week move from Horrible Monday's low of $3.95 of 26.8%. Yee-ha!

See you at the town hall meeting next Thursday.


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 342.45, up from yesterday's 286.76 and above the 1-month moving average of 323.91. The EMI continues to be down from the high set on January 4th and set a new 2011 low of 225.03 on May 23rd. There may be a reversal to the upside in the works.

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 77.02, down from yesterday's 77.28 and above its 1-month average of 76.68. The gold-gaining-value trend is intact but stalling. Today's Value Adjusted Gold Price (VAGP) is $1,657.9/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 $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 $100.75
ICE North Sea Brent crude $115.20
Spread (ICE- NYMEX) = $14.45 (Yesterday, $13.80)

Here are the September contracts* with a narrower spread:

NYMEX light sweet crude $101.77
ICE North Sea Brent crude $114.37
Spread (ICE- NYMEX) = $12.60 (Yesterday, $11.80)

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

Prices are off their crisis highs but we still have $110+ Brent and $100+ NYMEX in September favoring high 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 just above its 200-day moving average of $50.26 (our new warning level, 05/25 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 YELLOW light is turned back on for Investor Confidence as some investors avoid commodity-sensitive equities

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 $0.52 in early trading at $100.75 (July contract, most active); Gold is up $5.4 to $1528.2 (June contract, most active); Silver is up $0.550 to $37.880 (July contract, most active); Copper is up $0.0675 at $4.1785 (July contract, most active)

Western Molybdenum Oxide is $16.65; European Molybdenum Oxide is $16.60; LME cash seller is $17.10, LME moly 3-month seller's contract is $17.24

Stock Market Morning Update

The DOW is up 46,16 points to 12,448.92; the S&P 500 is up 5.35 at 1,331.04

Miners are up:

Barrick (ABX) $47.50 up 0.70%
Newmont (NEM) $56.69 up 1.54%
US Gold (UXG) $6.98 up 1.45%
General Moly (Eureka Moly, LLC) (GMO) $5.01 up 2.45%
Thompson Creek (TC) $10.76 up 1.03%
Freeport-McMoRan (FCX) $51.60 up 2.40% (a bellwether mining stock spanning copper, gold & molybdenum)

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

ArcelorMittal (MT) $32.98 up 1.26% - global steel producer
POSCO (PKX) $100.88 up 0.38% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is up 1.32% at $1,764,650.19(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 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