The Maiden Moon Returns - Will We Fare Better?

Morning Miners!

It is 5:47 AM. Have a cup of Raine's famous New Moon Java for a little more lunar luck. We may need it as we start the second half of 2011 but for now the Report wishes you and your family a Happy Fourth of July!

The Maiden Moon Returns - Will We Fare Better?


On the last new moon I said, "...maybe the metals & miners will fare better in June." That was wishful thinking. May and June have been real bruisers but we are starting the second half of the year, maybe the metals & miners will fare better in July.

One lunar cycle ago the report also stated, "The beginning of every month brings on a host of global and domestic data, the big boy will be the Labor Department's jobs report this Friday. Already we have declining Purchasing Manager Index (PMI) data from China supporting their anticipated economic slowdown..." New lunar cycle: the Labor report will be out next Friday and the latest PMI data from China is declining more.

China Federation of Logistics and Purchasing said this morning that China's official PMI for June fell to 50.9 from 52.0 in May; market watchers expected 51.3. HSBC's independently derived China PMI for June dipped from 51.6 to 50.1, the lowest in 11 months. A PMI of less than 50 implies a contraction of factory activity. You may remember from yesterday's report that "Commodity King" Dennis Gartman and Seabreeze Partners Doug Kass have both been throwing out dire warnings about declining global PMIs.

But wait, before we pass around the Kleenex, here is a real surprise! The Wall Street Journal just reported that, "The U.S. manufacturing sector expanded briskly in June, according to data released Friday by the Institute for Supply Management...The ISM's manufacturing purchasing managers' index rose to 55.3 in June from 53.5 in May. Readings above 50 indicate expanding activity."

That's a switch. The broader markets opened while I was digesting all this news. The ISM announcement at 10:00 AM ET just popped the S&P 500 8 points to 1,329.11 - remember we were wallowing in 1,260 territory just 7-market days ago (6/23/2011)? That's impressive, pardner. Let me go check on the metals & miners.

OK, the Eureka Miner's Index(EMI) is up slightly from yesterday, 289.8 versus 283.2, but marks its second day above the one-month moving average (see below). Not great but not bad.

Freeport-McMoran (FCX)is also spending its second day above its 200-day average which is also encouraging on higher red metal prices. COMEX copper is presently at a a healthy $4.2740/lb but COMEX gold and silver are getting hammered. COMEX gold has fallen below the $1,500/oz level to $1,485.90/oz; silver is down a buck to $33.820/oz.

Most troubling for me is that copper and gold are now in a deepening inversion (by this report's definition this occurs when both 1-month and 3-month correlations are negative). In fact of the six commodity correlations that we monitor with care, four are now negative as we start the second half of the year. Not a terrific sign - metals & miners do best when all six are positive.

A mixed bag, pardner. Let's go shoot off some fireworks!

Molybdenum Watch

This Monday the Report put molybdenum on price watch as western spot prices dropped below the $15 level. 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 $14.74/lb
LME 3-month seller $14.74

Western moly again finds itself in backwardation with the LME 3-month seller. Look for further spot price decline.


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 289.77, up from yesterday's 283.21 and above the 1-month moving average of 228.32 for the second day. The EMI is down from the high of January 4th and set a new 2011 low on June 27th 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 78.21, down from yesterday's 79.00 and below its 1-month average of 80.09. The new high for 2011 is 82.20 set June 23rd. Today's Value Adjusted Gold Price (VAGP) is $1,586.9/oz or $101.6/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 $94.32
ICE North Sea Brent crude $110.78
Spread (ICE- NYMEX) = $16.46 (Yesterday, $17.47)

Here are the October contracts* with a narrower spread:

NYMEX light sweet crude $94.34
ICE North Sea Brent crude $110.63
Spread (ICE- NYMEX) = $16.29 (Yesterday, $16.35)

* 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 rough but possibly improving roads; The VIX or "fear index" is below 25; bellwether Freeport-McMoRan (FCX) remains slightly above its 200-day moving average of $51.84 (our new warning level, 06/30 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 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 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 down $1.10 in early trading at $94.326 (August contract, most active); Gold is down $17.5 to $1484.9 (August contract, most active); Silver is down $1.012 to $33.840 (September contract, most active); Copper is up $0.0070 at $4.2895 (September contract, most active)

Western Molybdenum Oxide is $14.88; European Molybdenum Oxide is $15.10; LME cash seller is $14.74, LME moly 3-month seller's contract is $14.74

Stock Market Morning Update

The DOW is up 109.02 points to 12,523.36; the S&P 500 is up 9.34 at 1,329.98

Miners are mixed:

Barrick (ABX) $44.44 down 1.88%
Newmont (NEM) $53.26 down 1.32%
US Gold (UXG) $5.73 down 4.98%
General Moly (Eureka Moly, LLC) (GMO) $4.32 down 3.14%
Thompson Creek (TC) $10.03 up 0.50%
Freeport-McMoRan (FCX) $53.03 up 0.25% (a bellwether mining stock spanning copper, gold & molybdenum)
Quadra FNX (TSE:QUX) $14.89 up 0.77%

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

ArcelorMittal (MT) $34.99 up 0.66% - global steel producer
POSCO (PKX) $108.02 down 0.55% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is down 1.30% at $1,660,478.97 (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 (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