"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.

Thursday, June 30, 2011

Dumb or Desperate? Copper Up, Moly Drops Below $15

Morning Miners!

It is 6:01 AM. Have a cup of Thor's Day Thunder Dunder. I called our favorite Norseman dunder-headed for fixing the coffee double-strong this morning; maybe he's smarter than I think...

Dumb or Desperate?

We may need strong coffee next week. After a welcome Fourth of July hoo-rah, the short market week starts with no more Federal Reserve quantitative easing (QE-2 ends today) and faces the dreaded monthly labor report on Friday. Today marks the end-of-the-quarter and there appears to be a sentiment to close the books up after a horrifying May and June for the poor Metals & Miners. Let's join the party for now.

On Monday, we added "the Dumb" to this Report's "The Good, the Bad and the Ugly" market outlook. The ole Colonel called the International Energy Agency (IEA) plan to lower oil prices, by dropping 60 million barrels of oil on the market, dumb:

My complaint is that such ham-fisted interventions usually trigger the Law of Unintended Consequences. In a normally functioning marketplace, supply and demand trumps frivolous speculation over time. Governments or international agencies trying to save the world in a hurry often forget basic market physics and here we are...I'll bet oil prices head back towards mid-$90/bbl pasture before long and it might be a good time to buy some precious metals on the cheap (Eureka Miner, 6/23/2011)

Pardner, "before long" got here in a hurry. This morning Nymex oil is trading at $94.86/bbl (see Daily Oil Watch below). Here is how oil, gold & copper reacted to the IEA plan:

6/22 closing markets prior to the IEA announcement

NYMEX oil $95.41/bbl
COMEX gold $1,553.4/oz
COMEX copper $4.1070/lb

6/23 Intraday lows after the IEA announcement

NYMEX oil $89.61/bbl on 6/27 down 6.1%
COMEX gold $1,490.8/oz on 6/27 down 4.0%
COMEX copper $4.034/lb on 6/23 down 1.8%

6/30 Thursday morning prices

NYMEX oil $94.86/bbl
COMEX gold $1,511.2/oz
COMEX copper $4.2470/lb

I threw a little glitter in the buckboard when gold went sub-$1500/oz. Doug Kass of Seabreeze Partners had a different take; maybe the move move wasn't dumb but desperate:

“When I looked at the SPR [Strategic Petroleum Reserve] release and listened to Bernanke's press conference I got a sense of panic from the policy makers...We're entering an uncertain and scary market." (Doug Kass, CNBC Business News, 6/23/2011)

I respect both Mr. Kass and "Commodity King" Dennis Gartman - both have cited globally declining PMIs as a troubling sign for markets going forward. Gartman warns of $3.50/lb copper levels ahead; today we're nearly back to $4.25/lb. Not too many folks have gotten rich betting against these two market veterans, pardner. Stay tuned.

Molybdenum Watch: Copper Up, Moly Drops Below $15

This Monday the Report put molybdenum on price watch as western spot prices dropped to the low-$15 level; yesterday they fell to $14.88/lb. Here is the latest 3-month chart:

On June 15th, the ole Colonel had a hunch that moly pricing was setting up for the downside. We reported a subtle shift in molybdenum markets when Western moly oxide on the spot market found itself above the London Metal Exchange (LME) 3-month seller's contract in price. Although the difference was small this so-called "backwardation" was a condition we have not seen for some time. Spot prices typically trade below future price expectations or in "contango" with the futures contracts. Unfortunately, my hunch proved true.

Here is yesterday's lineup:

Western moly oxide $14.88/lb
European Moly Oxide $15.10/lb
LME cash seller $15.10/lb
LME 3-month seller $15.10

If we now have a molybdenum canary in the global recovery mineshaft, she is not feeling well.

By contrast, our old trusty red metal canary is finding new sunlight in the shaft. London Metal Exchange (LME) inventories have resumed a downward trend, a potentially bullish sign for copper:

This morning LME copper is at an 8-week high; nickel posts a 1-month high and zinc is at levels not seen for two months. Is this just end-of-the-quarter shenanigans and the moly bird is telling us the real story? I'm afraid the ole Colonel is in the Kass-Gartman camp for now.

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 283.21, up from yesterday's 228.11 and above the 1-month moving average of 230.42 for the first time in a long time! The EMI is down from the high of January 4th and set a new 2011 low on June 270th at 180.03. However, 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 hot and cold markets 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 79.00, down from yesterday's 80.14 and below its 1-month average of 80.05. The new high for 2011 is 82.20 set June 23rd. Today's Value Adjusted Gold Price (VAGP) is $1,598.4/oz or $87.2/oz above the current COMEX gold price.

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 trended down since 6/7/2010 when it had a value of 100; recently, gold has been gaining value reversing the trend. These three commodities were chosen for relative value comparison because 1) oil is a common cost element for all miners, 2) copper has proven to be 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 $94.86
ICE North Sea Brent crude $112.33
Spread (ICE- NYMEX) = $17.47 (Yesterday, $16.28)

Here are the October contracts* with a narrower spread:

NYMEX light sweet crude $95.99
ICE North Sea Brent crude $1112.34
Spread (ICE- NYMEX) = $16.35 (Yesterday, $15.47)

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

Prices are off their crisis highs but we still have $110+ Brent and $90+ NYMEX in October favoring high oil prices throughout the summer and into fall. 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 still on very rough roads; The VIX or "fear index" is below 25; bellwether Freeport-McMoRan (FCX) is slightly above its 200-day moving average of $51.78 (our new warning level, 06/29 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 phases out buying Treasurys June 30th (aka QE2) but will maintain low interest rates for now

The YELLOW light is turned back on for Investor Confidence as more 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 up $0.09 in early trading at $94.86 (August contract, most active); Gold is up $0.8 to $1511.2 (August contract, most active); Silver is up $0.306 to $35.075 (September contract, most active); Copper is up $0.0230 at $4.2470 (September contract, most active)

Western Molybdenum Oxide is $14.88; European Molybdenum Oxide is $15.10; LME cash seller is $15.10, LME moly 3-month seller's contract is $15.10

Stock Market Morning Update

The DOW is up 93.51 points to 12,354.55; the S&P 500 is up 8.55 at 1,315.96

Miners are mixed:

Barrick (ABX) $45.09 up 0.02%
Newmont (NEM) $53.62 up 0.19%
US Gold (UXG) $5.95 down 1.49%
General Moly (Eureka Moly, LLC) (GMO) $4.32 down 0.92%
Thompson Creek (TC) $9.84 up 1.23%
Freeport-McMoRan (FCX) $52.27 up 1.28% (a bellwether mining stock spanning copper, gold & molybdenum)
Quadra FNX (TSE:QUX) $14.80 up 0.56%

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

ArcelorMittal (MT) $34.38 up 0.44% - global steel producer
POSCO (PKX) $108.22 up 0.81% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is down 0.05% at $1,664,365.61 (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 Mariana Titus

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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