Monday, June 13, 2011
The Colonel's Metals Outlook; Metals & Miners Weekly Roundup
It is 5:49 AM. Have a cup of Monday Hooyah Java - give it a shout and let's get to work...
The Colonel's Metals Outlook
It's a tough way to start a week when you're wondering whether that rustle in the bushes is a bear or just a bull who has lost his way. That's the June markets, pardner. Does the bull find its way back to pasture this summer or are we headed for some serious bear country?
At Friday's close our trusty Eureka Miner's Index(EMI) dropped to a another new low for 2011 (see below). I keep waiting for the EMI to bottom so we can head back up the canyon; maybe today...maybe not. We'll check on that in a moment when the broader markets open.
Dennis Gartman, "Commodity King" and respected author of the Gartman Letter, has been a busy prognosticator lately. Last week he was very bullish on gold at least in terms of the euro or pound sterling. This morning, Mr. Gartman is sending up warning flares on base metals, especially copper, as reported in a Kitco Market Nugget:
Market Nuggets: Gartman: Copper, Other Base Metals On Defensive Amid Economic Worries (Kitco News, 13 June 2011, 08:54 a.m.)
You may have to do a little digging on this link because the Market Nuggets update frequently. Mr. Gartman ponders the fate of copper and base metal prices given worrisome signs about the economy in the U.S. and elsewhere:
“Copper’s history is that when long-term, well defined upward sloping trends are broken, long-term, definitive and oft times surprisingly large bear moves follow. A close today or this week below the psychologically and technically important $4/lb level shall make the case for $3.50/lb to follow hard upon...and even that support shall likely prove ephemeral we fear,” he says. “And we need to note here that it is not just copper that is showing signs of fatigue; so too are most other base metals.”
Copper has been our faithful canary in the global recovery mineshaft since the darkest days of March 2009. I dread finding our faithful friend feet-up one morning in the COMEX cage. This is just a Gartman warning - one I'll listen to, however.
This weekend the ole Colonel updated his own models of oil, gold, silver and copper to see what lies ahead. You may recall that I look at commodities in relation to a reference commodity (gold or oil) to determine fair value, ranges and trends. Here is an example of copper versus gold prices:
Each chart is a scatter plot of recent futures prices for a commodity (e.g. copper) versus the reference commodity (e.g. gold). I then update a model each month (magenta line) with 3-month data for each commodity pair. The aqua lines show a statistical boundary for current price variations (yellow wiggly line) from the model. The blue line is a 20-day moving average of the commodity pair price. You can find larger plots of copper versus gold, copper versus oil, oil versus gold and silver versus gold near the bottom of this blog page.
Last month I predicted that COMEX gold prices would break $1,600/oz sometime before Labor Day. This would probably take a pretty scary headline to drive investors back to gold's safe haven but there are any number of possibilities these days (e.g., gridlock on raising the U.S. debt ceiling followed by a big hiccup in the bond market). One would expect commodities to suffer on such news and that is what the above plot suggests; as gold prices increase, copper prices fall consistent with Mr. Gartman's current thinking (i.e. gold bull, base metal bear).
Here is how copper, silver and oil fare in this scenario. For COMEX gold = $1,600/oz:
The fair value of COMEX copper is $4.0238/lb in a range of $3.7437/lb to $4.3039/lb
The fair value of COMEX silver is $44.751/oz in a range of $37.904/oz to $51.610/oz
The fair value of NYMEX oil is $108.13/bbl in a range of $98.54/bbl to $117.73/bbl
Today COMEX copper is trading very near the above fair value at $4.0270/lb. It could, however, fall below $3.75/lb as suggested by the lower limit. According these models, COMEX silver moves up with gold on scary news and could take another shot at breaking the Hunt Brother's all time record of $50.35/oz. I think this unlikely because silver will no doubt feel the headwinds of falling industrial demand in a downbeat economic scenario. Today COMEX silver is trading at $35.715/oz.
I'm less confident in the NYMEX oil numbers since the 3-month correlation of oil and gold just flipped negative (see below) this morning. Copper and oil are still showing a fairly tight positive 1- and 3-month correlation (both above 0.6) so it is likely that if copper falls, so will oil. Today NYMEX oil is trading down at $98.61/bbl.
Molybdenum spot prices are below $17/lb but remain fairly stable. Detailed prices and futures may be found below in the Weekly Molybdenum Roundup below.
The broader markets are now open with the S&P 500 and DOW up slightly from Friday's close. Let's see how our poor miners are feeling.
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 213.80, up from Friday's new 2011 low of 211.88 and below the 1-month moving average of 266.27. The EMI continues to be down from the high set on January 4th and 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 79.68 up from Friday's close of 79.08 and above the 1-month moving average is 78.45. Gold is gaining value. Today's Value Adjusted Gold Price (VAGP) is $1,601.2/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 $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 $98.61
ICE North Sea Brent crude $119.96
Spread (ICE- NYMEX) = $21.35 (Friday $18.85)
Here are the September contracts* with a narrower spread:
NYMEX light sweet crude $99.77
ICE North Sea Brent crude $118.88
Spread (ICE- NYMEX) = $19.11 (Friday $16.77)
* 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 $90+ NYMEX in September favoring high oil prices throughout the summer. Today's jump in spreads is notable. 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 +0.5572(1-month) -0.0338 (3-month)
Cu/Au correlation +0.6125 (1-month) -0.5505 (3-month)
Cu/Oil correlation +0.6831 (1-month) +0.6560 (3-month)
Here are the numbers from our last roundup (5/31/2011):
Oil/Au correlation +0.7892(1-month) +0.2439 (3-month)
Cu/Au correlation +0.7658 (1-month) -0.4468 (3-month)
Cu/Oil correlation +0.7342 (1-month) +0.5404 (3-month)
We now have two negative correlations with further deterioration in copper versus gold (1-month)and oil versus gold has just put a toe in 3-month negative territory, a bearish sign. Copper versus oil (3-month) maintains a fairly tight positive correlation for both 1- and 3-month data (>0.6). The metals & miners tend to do best when all correlations are positive.
According to my new June models (see bottom of blog page): oil is presently undervalued with respect to gold by -1.57 standard deviations and copper is undervalued by -0.81-standard deviations. Copper is presently undervalued with respect to oil by -0.76-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 was bullish but now with a drop into "+,-" quadrant the trajectory has turned bearish; the movement of copper vs gold in the "+,-" quadrant is down and bearish.
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. The errors have been falling lately which suggests a return to greater stability.
For the past 3-months we have these statistics given this mornings' numbers:
mean 14.289 bbl/oz
variation > 3.0% limit at 5.82% (1-standard deviation/mean)
mean 24.85 lbs/bbl
variation > 3.0% limit at 3.86% (1-standard deviation/mean)
mean 354.84 lbs/oz
variation > 3.0% limit at 5.70% (1-standard deviation/mean)
Weekly Molybdenum Roundup
Spot prices for molybdenum oxide are below $17/lb territory with $16.42/lb out West and $16.60/lb in Europe. Western and Euro moly spot prices remain in a mild 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 $17.01/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 $16.42/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) $16.60/lb (the price reported in the Metals Bulletin)
LME Futures Contracts
LME cash seller is at $37,200/metric ton $16.87/lb
3-Month (Buyer) $36,750/metric ton $16.67/lb
3-Month (Seller) $37,500/metric ton $17.01/lb
15-Month (Buyer) $35,500/metric ton $16.10/lb
15-Month (Seller) $38,750/metric ton $17.58/lb
Here is a 1-year chart of the LME 3-month contract (seller), please ignore the data glitch at the far right hand portion of the LME chart:
Daily Market Roundup
Enough talk, let's walk the walk:
Eureka Outlook Dashboard
4-WD is ON - The miners are in a rough shape; The VIX or "fear index" is below 25; bellwether Freeport-McMoRan (FCX) is below its 200-day average of $51.08(our new warning level, 06/10 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 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 $0.68 in early trading at $98.61 (July contract, most active); Gold is down $2.2 to $1527.0 (August contract, most active); Silver is down $0.612 to $35.715 (July contract, most active); Copper is down 0.0290 to $4.0290 (July contract, most active)
Western Molybdenum Oxide is $16.42; European Molybdenum Oxide is $16.60; LME moly 3-month seller's contract is $17.01, LME cash seller is $16.87
Stock Market Morning Update
The DOW is up 39.43 points to 11,991.34; the S&P 500 is up 3.89 at 1,274.87
Miners are mixed:
Barrick (ABX) $43.52 down 0.09%
Newmont (NEM) $52.16 up 0.12%
US Gold (UXG) $5.66 down 1.39%
General Moly (Eureka Moly, LLC) (GMO) $4.36 up 0.93%
Thompson Creek (TC) $9.55 up 0.53%
Freeport-McMoRan (FCX) $49.01 up 0.16% (a bellwether mining stock spanning copper, gold & molybdenum)
Quadra FNX (TSE:QUX) $13.82 up 0.07%
The Steels are mixed (a "tell" for General Moly & Thompson Creek):
ArcelorMittal (MT) $32.26 up 0.12% - global steel producer
POSCO (PKX) $100.25 up 0.59% - South Korean integrated steel producer
The Eureka Miner's Grubstake Portfolio is is down 0.21% at $1,612,483.46(what's this?).
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 email@example.com for answers to your questions or to request e-mail updates on the market