Stormy Monday - Metals & Miners Weekly Roundup

They call it Stormy Monday
Well the Tuesday's just as bad...

"Stormy Monday", Earl Hines, Billy Eckstine

Morning Miners!

It is 5:51 AM. Come on in, dry off and have a cup of Stormy Monday. The storm this morning is not just in Eureka, the markets have a little more rain on the way too. Nuts, I promise to end this report on a positive note...

Stormy Monday for Metals & Miners

Any morning that starts off with a reserve currency spiking a full percent or a major base metal dropping 4% or a barrel of oil falling $3/gal signals a bumpy market ride; when they all do it together, hold on to dashboard with both hands. The dollar index (.DXY) got a solid updraft from the bottom of its canyon on a diving euro this morning. The euro dropped below $1.40 briefly while the "Dixie" popped a percent. A strengthening dollar creates headwinds for "dollarized" commodities but a one-day 4% drop in spot copper prices is red metal in a gale. Don't worry about $100/bbl oil this morning - NYMEX crude is trading down to $97/bbl (remember the $113/bbl stuff earlier this month?).

I'm not sad to see oil prices decline and COMEX gold is proving stalwart in these winds; up a buck to $1508.9/oz. The ole Colonel will not be surprised to see gold move sideways for a while but move up it will if the present downbeat market sentiment persists.

So what is the latest gloom and doom? On a bad headline basis, European sovereign debt troubles are back in the news this morning with eyes on heavy losses by Spain's ruling party and widespread protests against austerity measures throughout the region. Fitch Ratings downgraded Greek debt on Friday and Standard & Poor's lowered Italy's credit outlook to negative on Saturday...haven't we seen this movie before?

We learned last year that any major economies with debt issues can create a pretty lousy environment for the metals and miners; today it's Spain, it could just as well be California later this year if their fiscal crisis spins out of control. What's the bigger picture here? I think the recent bearish attitude towards commodities in general stems from the winding down of various stimulus and monetary easing policies that were put in place to revive economies and reduce high unemployment in developed countries devastated by the Great Recession. In the United States, the Federal Reserve's quantitative easing program ends next month with a recovery that remains fragile and a labor market that shows only marginal signs of improving. This has soured more upbeat expectations for both domestic and global growth and that in turn has hammered the demand story for oil, base metals and other growth-sensitive commodities. So it goes.

What about that positive closing note? Last week this report did a two-part series on gold (Part I & Part II) and examined some of the reasons why I'm not too concerned about my favorite precious metal. On this Monday's scary headlines gold didn't pop but it is steadily gaining value against oil, copper and silver. This report's Gold Value Index (GVI) (see below) broke 80 this morning, up nearly 19% from its April low and continues to reverse the 11-month decline gold's relative value. The next trend up should be dollar price over the coming months - I'm sticking with my recent prediction that COMEX gold will break $1,600/oz before Labor Day.

Hey, it just stopped raining outside. The broader markets are open, the DOW is down 142 points but Barrick Gold (ABX) is up 1% and General Moly is still above 4-bucks. Now, don't you feel better?

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 225.03, down from from Friday's's close at 249.62 and below the 1-month moving average of 369.82. The EMI continues to be down from the high set on January 4th, and sets a new low today for 2011. The 1-month moving average has established a troubling downtrend.

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 80.25 up from Friday's close of 77.87 and above the 1-month moving average which is now 75.05. Gold is presently gaining value. Today is a new GVI high for 2011. Today's Value Adjusted Gold Price (VAGP) is $1,572.1/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 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

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 $100/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 $97.19
ICE North Sea Brent crude $109.31
Spread (ICE- NYMEX) = $12.12

Here are the September contracts* with a narrower spread:

NYMEX light sweet crude $98.00
ICE North Sea Brent crude $108.64
Spread (ICE- NYMEX) = $10.64

* 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 $100+ Brent and $90+ 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.

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 +0.7427 (1-month) +0.4404 (3-month)
Cu/Au correlation +0.4545 (1-month) -0.4680 (3-month)
Cu/Oil correlation +0.8895 (1-month) +0.3399 (3-month)

Here are the numbers from the last Monday (5/16/2011):

Oil/Au correlation +0.5067 (1-month) +0.6674 (3-month)
Cu/Au correlation +0.0969 (1-month) -0.4964 (3-month)
Cu/Oil correlation +0.8794 (1-month) -0.0464 (3-month)

We now have only one negative correlation with some improvement in copper versus gold (1-month) and copper versus oil (1- and 3-month). Oil and gold remain in the quadrant of positive correlation. Copper versus gold remain outside the inversion quadrant (i.e. both one-month & three-month correlations are negative). 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 -5.39 standard deviations and copper is undervalued by -2.80-standard deviations. Copper is presently undervalued with respect to oil by -3.63-standard deviations. The next model update will be in June.

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 continued movement of copper vs gold in the "+,-" quadrant is somewhat encouraging.

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 on shaky ground.

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 14.01 bbl/oz
variation > 3.0% limit at 4.54% (1-standard deviation/mean)

Oil:Copper ratio

mean 24.60 lbs/bbl
variation > 3.0% limit at 5.01% (1-standard deviation/mean)

Gold:Copper ratio

mean 344.41 lbs/oz
variation > 3.0% limit at 5.93% (1-standard deviation/mean)

Weekly Molybdenum Roundup

Spot prices for molybdenum oxide remain outside $17/lb territory with $16.65/lb out West and $16.72/lb in Europe. 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 $17.24/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 recent commodity reversals 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 $16.65/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) $16.72/lb (the price reported in the Metals Bulletin)

LME Futures Contracts

LME cash seller is at $37,700/metric ton $16.65/lb

3-Month (Buyer) $36,000/metric ton $16.33/lb
3-Month (Seller) $38,000/metric ton $17.24/lb

15-Month (Buyer) $37,700/metric ton $17.10/lb
15-Month (Seller) $38,700/metric ton $17.55/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 very rough patch; The VIX or "fear index" is below 25; bellwether Freeport-McMoRan (FCX) is below its 200-day average of $49.88(our new warning level, 05/16 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 YELLOW light is turned back on for Investor Confidence as investors begin to avoid commodity-sensitive equities

The ORANGE light is turned on our Fuel Gauge with oil above $90/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 down $2.91 in early trading at $97.19 (July contract, most active); Gold is up $1.0 to $1509.9 (June contract, most active); Silver is down $0.417 to $34.670 (July contract, most active); Copper is down $0.0100 to $3.9735 (July contract, most active)

Western Molybdenum Oxide is $16.65; European Molybdenum Oxide is $16.72; LME moly 3-month seller's contract is $17.24, LME cash seller is $16.65

Stock Market Morning Update

The DOW is down 141.68 points to 12,370.36; the S&P 500 is down 16.94 at 1,316.85

Miners are mixed:

Barrick (ABX) $46.05 up 0.99%
Newmont (NEM) $55.21 up 2.09%
US Gold (UXG) $6.73 up 0.30%
General Moly (Eureka Moly, LLC) (GMO) $4.05 down 1.02%
Thompson Creek (TC) $10.50 down 1.13%
Freeport-McMoRan (FCX) $47.80 down 1.20% (a bellwether mining stock spanning copper, gold & molybdenum)

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

ArcelorMittal (MT) $31.94 down 1.66% - global steel producer
POSCO (PKX) $101.60 down 1.54% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is is down 0.66% at $1,665,469.83(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).

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