"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 23, 2011

S&P, Gold, Copper, Moly Down; Another Market ROLAIDS®

ROLAIDS® Spells Fast Relief!

Morning Miners!

It is 5:57 AM. Have a cup of Summer Thunder. Our favorite Norseman is behaving like a bored kid on summer break. With no mischief in the skies, Thor is taking particular delight in break room discord and stormy markets.

S&P, Gold, Copper Down

I'm glad Ruby T is up in Elko today. She is our stalwart market bull in pitched battle with Old Miner Woden who warns constantly of darker days to come. Woden got a lot of support from Fed Chief Bernanke yesterday who talked down prospects for the domestic economy and provided no sign that the Federal Reserve would provide any additional monetary relief for now. The end of quantitative easing by the end of this month is a done deal.

I watched the COMEX copper futures and the S&P 500 both head south as Bernanke began speaking at 2:00 PM ET...down, down. The S&P dropped from an intraday high of 1,297.37 to close at 1,287.14; COMEX copper rolled from $4.092/lb to a lowly $4.028/lb in after-hours trading. So much for Wednesday morning's metals & miners rally.

COMEX gold took a hit too, presently down $28.2 to $1,525.2/oz; COMEX copper has recovered a tad but is still dangerously close to the key $4/lb level trading at $4.0440/lb. COMEX silver slumped with gold more than a buck to $35.580/oz. The broader markets are now open and the S&P 500 has fallen another 19.55 points to 1,267.59. It is unfair to blame all downside on Uncle Ben; Thursday morning opened with more weak jobs data, a surprise intervention in the oil markets and euro-zone worries that refuse to go away. The victim has been riskier assets.

Precious metals, which usually enjoy a safe haven lift on macro-worry days, are getting pounded by investor liquidations to cover riskier bets. Not a great environment for the metals and miners. Our trusty Eureka Miner's Index(EMI) has plunged back to sub-200 territory after briefly breaking above its 1-month moving average yesterday morning. The EMI is fortunately still above its 6/20/2011 low and low-side trend line (see below).

Miss Moly Stumbles Again

Last Wednesday, we reported a subtle shift in molybdenum pricing 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.

My hunch was that moly pricing may be setting up for the downside. On Tuesday, the report observed more deterioration in spot and futures pricing and yesterday was yet another step down the stairs.

Here is the latest lineup:

Western moly oxide $15.88/lb
European Moly Oxide $15.85/lb
LME cash seller $15.42/lb
LME 3-month seller $15.47

With moly spot prices still in backwardation and copper prices falling, I'm betting we'll see more downside. We are now below $16/lb and more ominously the 3-month seller is now below my 2010 moly price taget of $15.71/lb. Sorry folks, the ole Colonel is turning on the orange light for Miss Moly (see the Eureka Outlook Dashboard in the column to your right).

Another Market ROLAIDS®

Dennis Gartman, "Commodity King" and respected author of the Gartman Letter, was on CNBC Business News again forecasting trouble ahead for "Dr. Copper" and the base metals. For sometime, Gartman has advised buying gold in terms of the euro and pound sterling expecting more hard times ahead in Europe. Yesterday he added a clarion cry, "Buy gold, sell copper!"

Last Thursday this report reviewed Gartman's first suggestion which we implemented by buying gold and the U.S. Dollar Index last April. This is effectively a "soft short" on the euro and pound sterling since taken together these two currencies comprise 70.5% of the index. Here is an example of the technique with an update using the SPDR Gld Trust ETF GLD and the PowerShares DB US Dollar Index Bullish Fund UUP:

Last April:

4/21 buy 10 shares of GLD @$146.74 for $1,467.40
4/20 buy 69 shares of UUP @$21.32 for $1,471.08
Total investment = $2,938.48

At this morning's prices:

10 shares of GLD is valued at $1,486.00 ($148.60/sh.) for a $18.60 profit
69 shares of UUP is valued at $1,491.09 ($21.61/sh.) for a $20.01 profit
Total value = $2,977.09 with a profit of $38.61 or 1.31%

With even a $28 drop in gold prices today, this market ROLAIDS® remains above water with today's strengthening dollar. If precious metal liquidations ease and the euro heads into sub-$1.40 territory, this trade should do just fine.

What about another ROLAIDS® for our bumpy market ride? To follow Gartman's second suggestion, the ole Colonel put together another hypothetical trade with GLD and SMN (Proshares UltraShort Basic Materials ETF). Since SMN is a double-short we'll only buy half as much as our new investment in gold:

At this morning's prices:

Buy 20 shares of GLD valued at $2,972.00 ($148.60/sh.)
Buy 78 shares of SMN valued at $1,492.92 ($19.14/sh.)
Total investment = $4,464.92

That's your new ROLAIDS® for the day. We'll keep track of both trades as events in these turbulent markets develop. Always do your own research, pardner; double-leveraged shorts can be like carrying nitro in your buckboard.

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 196.96, down from yesterday's 252.11 and below the 1-month moving average of 249.75. The EMI is down from the high of January 4th and set a new 2011 low on June 20th at 183.47. 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 82.20, up from yesterday's 81.91 and above its 1-month average of 79.34 and setting a new high for 2011. Today's Value Adjusted Gold Price (VAGP) is $1,550.3/oz or just $25.1/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 $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 $91.44
ICE North Sea Brent crude $109.11
Spread (ICE- NYMEX) = $17.66 (Yesterday, $17.49)

Here are the October contracts* with a narrower spread:

NYMEX light sweet crude $92.53
ICE North Sea Brent crude $108.8
Spread (ICE- NYMEX) = $16.27 (Yesterday, $16.83)

* 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 $100+ Brent and $90+ NYMEX in October favoring high oil prices throughout the summer and into fall although there is now downward pressure on oil prices. 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 very rough roads; The VIX or "fear index" is below 25; bellwether Freeport-McMoRan (FCX) is still below its 200-day moving average of $51.44 (our new warning level, 06/20 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 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 down $3.97 in early trading at $91.44 (August contract, most active); Gold is down $28.2 to $1525.2 (August contract, most active); Silver is down $1.159 to $35.580 (July contract, most active); Copper is down $0.0440 at $4.0440 (July contract, most active)

Western Molybdenum Oxide is $15.88; European Molybdenum Oxide is $15.85; LME cash seller is $15.42, LME moly 3-month seller's contract is $15.47

Stock Market Morning Update

The DOW is down 184.40 points to 11,925.27; the S&P 500 is down 19.55 at 1,267.59

Miners are getting trashed:

Barrick (ABX) $43.68 down 2.41%
Newmont (NEM) $53.21 down 1.63%
US Gold (UXG) $5.65 down 4.72%
General Moly (Eureka Moly, LLC) (GMO) $4.19 down 3.01%
Thompson Creek (TC) $9.58 down 1.64%
Freeport-McMoRan (FCX) $47.46 down 2.87% (a bellwether mining stock spanning copper, gold & molybdenum)
Quadra FNX (TSE:QUX) $13.40 down 2.30%

The Steels have their furnaces off (a "tell" for General Moly & Thompson Creek):

ArcelorMittal (MT) $31.60 down 2.53% - global steel producer
POSCO (PKX) $100.56 down 1.34% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is down 2.52% at $1,601,902.16 (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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