"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.

Tuesday, June 14, 2011

Copper up on China Data, Miners Rally

Morning Miners!

It is 5:55 AM. Here comes sweet Ruby T to the rescue. The ole Colonel must admit his ears are a little red this morning. Ruby heard some crackle on her CB yesterday that we had made bearish comments on the metals & miners in the Monday roundup. She blew into the break room this morning hollering, "Spot copper is up 2% - does that sound like a bear market? One of you market whiners get off your butt and fix me a cup of joe!" Maybe she has a point...

Copper up on China Data

Anytime copper makes a 2% jump it's time to take notice. London Reuters reported what was behind the move:

METALS-Copper gains after Chinese data, tightening move (Marie-Louise Gumuchian, London Reuters, Jun 14, 2011 12:15pm GMT)

Apparently, new data from China indicates that although inflation is rising for the dragon it is within expectations and not anticipated to seriously blunt his appetite for natural resources, especially copper. China is the world's top consumer of the red metal so the affect on demand of recent monetary tightening in response to inflation is closely watched. China's inflation which jumped to 5.5 percent in May and industrial output which rose 13.3 percent, were both in line with forecasts. So it goes.

This report tracks copper price because it has been a reliable proxy for global growth expectations. COMEX copper is presently trading at $4.1150/lb adding $0.0805/lb or up 2.0% along with spot prices. Last week we said we would watch the London Metal Exchange inventories to see if July demand from China will reverse the rise in warehouse stores. Got a nice flat top this morning, stay tuned:

The Other Scenario...

Yesterday we looked at a case where some scary event bumps COMEX gold to $1,600/oz and the metal prices head further south. This is consistent with Dennis Gartman's present outlook which is gold bullish (at least in terms of the euro and pound sterling) and base metal bearish. We shouldn't ignore warnings from the "Commodity King" and respected author of the Gartman Letter. I can't, however, ignore Ruby T who is still hollering in my ear to find my nerve in these tricky markets.

Let's look at the other scenario which says the domestic economy is better in the second half, we avoid a debt limit calamity in August, the euro currency doesn't crash and China keeps keeps gobbling resources albeit at a slower pace than last year. This morning's U.S. economic news is a least supportive of this outcome with the broader markets now opening sharply higher, boosted by a better-than-expected reading on retail sales and some positive corporate news.

One might reasonably expect gold to take a hit as safe haven investments flow back into the equity and commodity markets. Let's say instead of jumping to $1600/oz, gold falls to $1450/oz on all this improving news.

Based on my latest June models, here is how copper, silver and oil fare for this scenario. For COMEX gold = $1,450/oz:

The fair value of COMEX copper is $4.2626/lb in a range of $3.9825/lb to $4.5428/lb
The fair value of COMEX silver is $37.433/oz in a range of $30.580/oz to $44.285/oz
The fair value of NYMEX oil is $104.011/bbl in a range of $94.416/bbl to $113.605/bbl

Hmm, that's a lot better than yesterday at least for the red metal and oil. COMEX copper would move back to a fair value near $4.25/lb and probably avoid sub-$4/lb territory. It won't be breaking records on the top-end but that makes sense since global growth expectations are lower now than earlier this year.

Silver won't be high-flying either but most likely will stay above $30/oz which is not all bad. Its monetary aspect will be tarnished a bit along with gold but growing industrial demand may push silver back to mid-$40 pasture. By the by, Mining Editor Adella Harding did a niece piece last night on more emerging high-tech uses for silver:

Solar industry using silver (Adella Harding, Elko Daily Free Press, June 12, 2011)

Lastly, high oil prices are probably going to be with us no matter what the scenario for this summer (see below) but neither case has an upper bound in the dreaded $120/bbl bad lands.

Ruby T is still fuming but I'd say a little happier. Is it the Dennis or Ruby scenario? We'll find out soon enough...

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 229.95, up from yesterday's 213.80 and below the 1-month moving average of 265.44. The EMI is down from the high of January 4th but above the 2011 low of 211.88 set 6/10/2011. The 1-month moving average continues a troubling downtrend.

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 79.45, up from yesterday's 79.86 and above its 1-month average of 78.42. The gold-gaining-value trend is now moving sideways. Today's Value Adjusted Gold Price (VAGP) is $1,593.7/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 $97.30
ICE North Sea Brent crude $119.98
Spread (ICE- NYMEX) = $22.68 (Yesterday, $21.35)

Here are the September contracts* with a narrower spread:

NYMEX light sweet crude $98.31
ICE North Sea Brent crude $118.75
Spread (ICE- NYMEX) = $20.44 (Yesterday, $19.11)

* 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. 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 still below its 200-day moving average of $51.15 (our new warning level, 06/13 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 in June (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 ORANGE light is turned on our Fuel Gauge with oil above $90

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 unchanged in early trading at $97.30 (July contract, most active); Gold is down $0.3 to $1515.3 (August contract, most active); Silver is down 0.182 to $34.555 (July contract, most active); Copper is up $0.0805 at $4.1150 (July contract, most active)

Western Molybdenum Oxide is $16.42; European Molybdenum Oxide is $16.60; LME cash seller is $16.87, LME moly 3-month seller's contract is $17.01

Stock Market Morning Update

The DOW is up 134.72 points to 12,087.69; the S&P 500 is up 16.52 at 1,288.35

Miners are happy:

Barrick (ABX) $44.10 up 1.64%
Newmont (NEM) $52.39 up 1.33%
US Gold (UXG) $5.69 up 3.45%
General Moly (Eureka Moly, LLC) (GMO) $4.45 up 1.37%
Thompson Creek (TC) $9.85 up 1.86%
Freeport-McMoRan (FCX) $49.69 up 2.81% (a bellwether mining stock spanning copper, gold & molybdenum)
Quadra FNX (TSE:QUX) $13.97 up 1.35%

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

ArcelorMittal (MT) $32.72 up 2.25% - global steel producer
POSCO (PKX) $100.79 up 0.57% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is up 1.69% at $1,623,347.81 (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 (source: Wikipedia)

Headline photograph by Colonel Possum of Mariana Titus in her outdoor studio, Eureka, NV

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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