"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.

Monday, July 18, 2011

Gold Breaks $1,600; General Moly (GMO) Makes Significant Milestone

(Metal Art by Mariana Titus)

"Stay tuned, $1,600/oz here we come." – Colonel Possum, 5/19/2011

Morning Miners!

It is 5:41 AM. Have a hot cup of Monday Bullion Buster. We made it, pardner!

The Colonel's Metals & Miners Outlook

On May 19th, the ole Colonel predicted that COMEX gold would break $1,600/oz before Labor Day. This morning COMEX gold set a new record in the wee hours hitting $1,603.80/oz (4:50 AM PT) and silver broke $40/oz 15 minutes later at $40.48/oz. Presently both have pulled back a tad trading at $1,598.9/oz and $40.295/oz respectively. The silver bounce is notable because it puts the closely watched gold/silver ratio below 40; a level not seen since May 31st.

The steady rise in gold and silver lately is attributed to the increasing uncertainty surrounding both the euro-zone and U.S. debt issues. Base metals are feeling downward pressure on this worry but copper remains well supported by supply restriction concerns for the remainder of the year. There is also evidence that the Chinese restocking of the red metal has taken a pause on inflation concerns (6.4% year-to-year in June) and Chinese traders waiting for price consolidation. The decline in London Metal Exchange copper inventories tells the story as declines hit a flat spot:

Currently COMEX copper is down $0.0100/lb at $4.3970/lb. I have said before that supply concerns should put a $4/lb floor under copper for the remainder of the summer. The good news for miners is that the copper/gold price correlation is becoming increasingly positive, a bullish indicator for the mining sector (see Oil & Copper Correlations with Gold below).

Molybdenum spot prices may be forming a bottom after a fairly dramatic descent form $17/1b territory to the $14/lb bad lands. Fundamentals and futures indicate that the fall season should enjoy a price rise; I've put money on breaking $16/lb again before Halloween (see Molybdenum Roundup below)

The broader markets have just opened down but our favorite miners are trading up. Barrick Gold (ABX) is up 1.43% at $49.00, bellwether miner Freeport-McMoRan is up 0.80% at 55.78 and General Moly (GMO) is up 1.35% at $4.51.

General Moly (GMO) Makes Significant Milestone

General Moly made a significant milestone Friday on their lingering water rights issue. The Nevada State Engineer granted General Moly's water right applications for the use of 11,300 acre-feet annually of water for the Mt. Hope Project, which will facilitate the pumping of approximately 7,000 gallons per minute. Here is the press release:

General Moly Announces Water Rights Approval for Mt. Hope Project (Press release, 7/15/2011)

Mining editor Adella Harding wrote an excellent piece on this ruling in the Friday Elko Daily Free Press. It includes comments from GMO's Pat Rogers and Zach Spencer as well as Eureka County Commissioner Jim Ithurralde :

General Moly wins OK on water rights (ADELLA HARDING Mining Editor, Elko Daily Free Press, July 15, 2011 3:30 pm)

OK, now let's get on to the Record-of-Decision, buckaroos!

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 291.32, down from Friday's close at 298.66 and above the 1-month moving average of 255.85. The EMI is down from the high of January 4th and set a new 2011 low on June 27th at 180.03. The 1-month moving average has broken its troubling downtrend and is heading north.

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 79.78 up from Friday's 79.39 and below the 1-month moving average of 80.08. Gold is moving sideways with respect to relative value. Today's Value Adjusted Gold Price (VAGP) is $1,674.6/oz; $75.7 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 trended down since 6/7/2010 when it had a value of 100; gold regained value recently but now appears to be moving sideways. 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 wide 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 $96.46
ICE North Sea Brent crude $116.84
Spread (ICE- NYMEX) = $20.38 (Friday $20.26)

Here are the October contracts* with a narrower spread:

NYMEX light sweet crude $96.84
ICE North Sea Brent crude $116.72
Spread (ICE- NYMEX) = $19.80 (Friday $19.51)

* 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 $110+ Brent and $95+ 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.

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.

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

Oil/Au correlation +0.6093(1-month) -0.0158 (3-month)
Cu/Au correlation +0.5248 (1-month) +0.4810 (3-month)
Cu/Oil correlation +0.8316 (1-month) +0.2424 (3-month)

Here are the numbers from our last roundup (7/11/2011):

Oil/Au correlation +0.3393(1-month) -0.0991 (3-month)
Cu/Au correlation +0.0356 (1-month) -0.0434 (3-month)
Cu/Oil correlation +0.2104 (1-month) +0.4279 (3-month)

There has been significant improvement in the latest numbers. We have only one remaining negative correlation with oil versus gold nearly turning positive on its 3-month. The movement of copper versus gold away from inversion (i.e. 1- and 3-month correlations negative)and into positive territory is dramatic and bullish. Copper versus oil is showing very strong correlation (>0.8) in its 1-month number. The metals & miners tend to do best when all correlations are positive.

According to my new July models, oil is presently near fair value with respect to gold by -0.02-standard deviations and copper is overvalued by +3.35-standard deviations. Copper is presently overvalued with respect to oil by +3.43-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 1, 2010; 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. The return of oil vs gold to the "+,-" quadrant was bearish but the upward trajectory remains encouraging. The movement of copper vs gold from the "-,-" quadrant to the "+,+" quadrant (white arrow) is a very bullish straight-line trajectory.

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 but improving ground with a much more stable gold:copper relation.

Once the ratios exceed 3% error, they become less useful in predicting the price moves of one commodity with respect to another in the ratio pair. The errors have been falling which suggests a return to greater stability (i.e. declining CRS, see below) with gold:copper dipping below 3% for the first time since late December.

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

Gold:Oil ratio

mean 15.29 bbl/oz
variation > 3.0% limit at 6.20% (1-standard deviation/mean)

Oil:Copper ratio

mean 24.09 lbs/bbl
variation > 3.0% limit at 6.27% (1-standard deviation/mean)

Gold:Copper ratio

mean 366.93 lbs/oz
variation < 3.0% limit at 2.87% (1-standard deviation/mean)

It is notable that by the gold:copper 3-month ratio, $1,600/oz gold suggests $4.36/lb copper. This morning gold is $1598.9/oz and copper is $4.3970/lb, not too bad!

The composite Commodity Ratio Stability (CRS) is 5.35% (i.e the root-mean-square of the three variations above); last roundup was 5.44% - smaller is better.

Weekly Molybdenum Roundup

Spot prices for molybdenum oxide remain below $15/lb except; futures seller contracts are now all above. We have $14.29/lb spot out West and $14.65/lb in Europe. Both spot prices are in an improving 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 $15.06/lb is 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 May-June commodity reversals have put a large damper on that expectation.

Here is a detailed pricing summary for last week:

Western Moly Oxide $14.29/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) $14.65/lb (the price reported in the Metals Bulletin)

LME Futures Contracts

LME cash seller is at $33,200/metric ton $15.06/lb

3-Month (Buyer) $32,200/metric ton $14.61/lb
3-Month (Seller) $33,200/metric ton $15.06/lb

15-Month (Buyer) $33,400/metric ton $15.15/lb
15-Month (Seller) $34,400/metric ton $15.60/lb

Here is a 1-year chart of the LME 3-month contract (seller):

Daily Market Roundup

Enough talk, let's walk the walk:

Eureka Outlook Dashboard

4-WD is OFF - The miners are on smoother roads; The VIX or "fear index" is below 25; bellwether Freeport-McMoRan (FCX) remains above its 200-day moving average of $52.16 and 150-day moving average of $53.41 (our new key levels, 07/08 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. The Federal Reserve phased 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 some 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 $0.78 in early trading at $96.46 (August contract, most active); Gold is up $8.8 to $1598.9 (August contract, most active); Silver is up $1.224 to $40.295 (September contract, most active); Copper is down $0.0160 to $4.3970 (September contract, most active)

Western Molybdenum Oxide is $14.29; European Molybdenum Oxide is $14.65; LME moly 3-month seller's contract is $15.06, LME cash seller is $15.06

Stock Market Morning Update

The DOW is down 106.41 points to 12,373.32; the S&P 500 is down 9.30 at 1,306.84

Miners are up:

Barrick (ABX) $49.00 up 1.43%
Newmont (NEM) $58.58 up 2.09%
US Gold (UXG) $6.94 up 4.05%
General Moly (Eureka Moly, LLC) (GMO) $4.51 up 1.35%
Thompson Creek (TC) $9.99 up 0.71%
Freeport-McMoRan (FCX) $55.78 up 0.80% (a bellwether mining stock spanning copper, gold & molybdenum)
Quadra FNX (TSE:QUX) $14.82 up 1.07%

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

ArcelorMittal (MT) $31.58 down 1.93% - global steel producer
POSCO (PKX) $105.56 down 3.31% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is is up 1.15% at $1,771,149.44(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 (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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