"The history of Eureka lies in its future." - Lambert Molinelli, 1878

DISCLOSURE

The author/editor of the Eureka Miner owns common shares of local mining stocks, General Moly (GMO), McEwen Ming (MUX) 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.

Monday, June 27, 2011

Gas & Gold Prices Down, What's Next?- Metals & Miners Weekly Roundup


Morning Miners!

It is 5:29 AM. Have a cup of Summer Sunshine! The Report will go off the air for two-days but will be back bright and early Thursday, 6/30/2011. Let's see what's up (and down) this morning...

The Colonel's Metals & Miners Outlook

As we said in last Monday's roundup, the months of May and June have been rough on the metals & miners (The Good, the Bad and the Ugly). This Report's Eureka Miner's Index (EMI) plumbed a new low for 2011 a week ago and descended further today. This is not good news, pardner - this is the ninth new low since early May. The EMI gives us the market temperature for the factors that have the greatest impact on mining in Eureka County (see EMI discussion below).

Falling Fuel Prices

On the bright side, fuel prices continue to fall at the pump. You can monitor the latest Nevada fuel prices in the Daily Oil Watch below. This morning the average price of regular gasoline for Nevadans at the pump is $3.582/gal; the national average is slightly lower at $3.580/gal. Here is a 1-month chart of average Nevada gas prices:



Here are the latest reported lows and highs in the state for regular gasoline:

$3.29/gal
Rebel
3051 E Bonanza Rd & N Mojave Rd, Las Vegas – East

$4.29/gal
Shell
1237 6th St near US Hwy 93, Wells

Since fuel prices are an important cost element for mining, lower costs are good for miners, but...

Falling Oil & Gold Prices

Last week we talked about the good, the bad and the ugly. Let's add "the dumb" today. With lowered expectations for domestic and global growth, commodity prices have been declining - unfortunately that wasn't good enough for the International Energy Agency. Last week they decided, with U.S. concurrence as a member, to dump 60 million barrels of oil on international markets over the next month. The U.S. contribution will be half of the total or 30 million barrels taken from our strategic petroleum reserve. This is not even a single day of global consumption demand! The latest IEA 2011 consumption rate estimate is 89.3 million barrels per day.

This action is designed to lower oil prices further by shaking long-side speculators from the futures markets. The announcement did drop futures prices last Thursday to the low-$90s and this morning NYMEX crude is trading at $90.01/bbl. Brent crude (the European benchmark) also dropped, presently trading at $104.00/bbl and the spread between NYMEX and Brent has come down sharply to $14 compared to mid-$20 just days ago (see Daily Oil Watch below). So the action did create pressure on speculators holding long positions (those who bet that oil will continue to go up).

So what's so bad with that? For one thing, it is now suspected that word of the IEA move was leaked to short-sellers who no doubt made a ton of money in the oil futures market knowing beforehand that prices would drop. This matter is now under investigation. On the losing side, it is suspected that the folks stuck holding long positions liquidated safer assets such a gold and silver to cover their bets. The flight from "risky assets" spread to other commodities including metals. This morning COMEX copper teeters on the key-$4/lb level at $4.0475/lb and COMEX gold has dropped below $1,500/oz to trade at $1,498.2/oz. COMEX silver is down another 83-cents at $33.805/oz.

In fairness, one cannot blame the IEA for all the recent carnage in the metals complex but one also cannot ignore how interconnected all these commodities are. 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. However, base metals and molybdenum will probably continue to face further challenges with contracting global demand. This chart tells the story of Miss Moly's recent travails in Europe (see the weekly moly roundup below)...



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 180.03 setting a new low for 2011, down from Friday's close at 190.44 and below the 1-month moving average of 242.68. The EMI continues to be down from the high set on January 4th and the 1-month moving average continues 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 82.15 up from Friday's close of 81.07 and above the 1-month moving average is 79.61. Gold is holding on to value even though dollar prices are in decline. Today's Value Adjusted Gold Price (VAGP) is $1,523.9/oz just $25.7 above the present 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 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 narrowing 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 $90.01
ICE North Sea Brent crude $104.00
Spread (ICE- NYMEX) = $13.99 (Friday $15.23)

Here are the October contracts* with a narrower spread:

NYMEX light sweet crude $91.17
ICE North Sea Brent crude $104.38
Spread (ICE- NYMEX) = $13.21 (Friday $14.72)

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

Prices are off their crisis highs but we still have $100 Brent and $90+ NYMEX in October favoring high oil prices throughout the summer and into fall although there is now downward price pressure. 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 the latest downbeat economic news.

Here are the latest correlations given this morning's NYMEX/COMEX trading:

Oil/Au correlation +0.3688(1-month) -0.3083 (3-month)
Cu/Au correlation +0.1687 (1-month) -0.4489 (3-month)
Cu/Oil correlation +0.4400 (1-month) +0.7458 (3-month)

Here are the numbers from our last roundup (6/20/2011):

Oil/Au correlation +0.1252(1-month) -0.2443 (3-month)
Cu/Au correlation +0.2624 (1-month) -0.5401 (3-month)
Cu/Oil correlation +0.4005 (1-month) +0.7313 (3-month)

We continue to have two negative correlations with recent movement in copper versus gold and oil versus gold from deep inversions (1- and 3-month correlations negative). Copper versus oil maintains a fairly tight positive correlation with 3-month data >0.7 as both have been trending down together. 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 -3.19-standard deviations and copper is undervalued by -0.99-standard deviations. Copper is presently overvalued with respect to oil by +0.513-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 IEA caused an interesting jog in the trajectory (bullish); the movement of copper vs gold in the "+,-" quadrant was toward inversion territory (white arrow) but has turned away this morning (not shown).

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 which suggested a return to greater stability but lately there are signs of divergence in Gold:Oil and Oil:Copper.

For the past 3-months we have these statistics given this mornings' numbers:

Gold:Oil ratio

mean 14.692 bbl/oz
variation > 3.0% limit at 7.33% (1-standard deviation/mean)

Oil:Copper ratio

mean 24.73 lbs/bbl
variation > 3.0% limit at 4.48% (1-standard deviation/mean)

Gold:Copper ratio

mean 362.39 lbs/oz
variation > 3.0% limit at 4.66% (1-standard deviation/mean)

The composite Commodity Ratio Stability (CRS) is 5.639% (i.e the root-mean-square of the three variations above).

Weekly Molybdenum Roundup

Spot and futures prices for molybdenum oxide are now all below $16/lb territory with $15.18/lb spot out West and $15.25/lb in Europe. Western and Euro moly spot prices are in a mild contango with 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 $15.42/lb is now below the Colonel's mid-range moly price target for 2010 of $15.71/lb and way below my target of $20.21/lb for 2011. The Report will give moly prices a "orange" light on the Eureka Outlook Dashboard for this bearish development. I did believe we could see much higher prices this year although recent commodity reversals have put a large damper on that expectation.

Here is a detailed pricing summary for last week:

Western Moly Oxide $15.18/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) $15.25/lb (the price reported in the Metals Bulletin)

LME Futures Contracts

LME cash seller is at $34,000/metric ton $15.42/lb

3-Month (Buyer) $33,000/metric ton $14.97/lb
3-Month (Seller) $34,000/metric ton $15.42/lb

15-Month (Buyer) $34,200/metric ton $15.51/lb
15-Month (Seller) $35,200/metric ton $15.97/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 turn adverse to 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 $1.15 in early trading at $90.01 (August contract, most active); Gold is down $2.7 to $1498.2 (August contract, most active); Silver is down $0.883 to $33.805 (July contract, most active); Copper is down 0.0510 to $4.0470 (July contract, most active)

Western Molybdenum Oxide is $1518; European Molybdenum Oxide is $15.25; LME moly 3-month seller's contract is $15.42, LME cash seller is $15.42

Stock Market Morning Update

The DOW is up 51.92 points to 11,986.50; the S&P 500 is up 3.80 at 1,272.25

Miners are down:

Barrick (ABX) $42.74 down 0.70%
Newmont (NEM) $51.94 down 0.63%
US Gold (UXG) $5.45 down 2.33%
General Moly (Eureka Moly, LLC) (GMO) $4.25 down 1.85%
Thompson Creek (TC) $9.40 down 0.95%
Freeport-McMoRan (FCX) $47.87 down 1.16% (a bellwether mining stock spanning copper, gold & molybdenum)
Quadra FNX (TSE:QUX) $13.41 down 1.41%

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

ArcelorMittal (MT) $32.01 down 0.03% - global steel producer
POSCO (PKX) $104.04 down 0.01% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is is down 0.95% at $1,587,896.23(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

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