"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, September 29, 2011

Gold Volatility Turns the Corner; Western Moly Drops

My latest Kitco Commentary: Why is Gold More Volatile than Copper, Oil or Silver? (09-19-2011)

This morning's...
COMEX Gold price = $1,630.6/oz (December contract most active)
Eureka Miner’s Gold Value Index© (GVI) = 102.22
Value Adjusted Gold Price© (VAGP) = $1,332.8/oz
COMEX - VAGP = $297.8/oz; gold is trading at a premium; gold:copper ratio remains at recessionary levels

Morning Miners!

It is 5:36 AM. Have a cup of Thor's Stormy Markets. Our favorite Norseman and I threw out Woden's terrible Cold Reality brew early this morning. Thor isn't a market bear or a bull, he just likes storms of any kind. For the past several weeks he's been singing,

Don't know why there's no sun up in the sky
Stormy markets since gold and metals ain't together
Keeps raining all the time, the time
Demand is down, gloom and debt everywhere
Stormy markets, just can't get Miss Moly together
It's raining all the time, the time

...to the tune of Harold Arlen's classic "Stormy Weather." Thor has a pretty good baritone but may have to change his tune...

Gold Volatility Turns the Corner

As for headlines, today is pretty upbeat. The Germans overwhelming approved the expansion of the EFSF rescue fund; so did Finland which was perceived challenging. As Woden pointed out yesterday, you need all 17 euro-zone countries to approve this plan but Germany and Finland buy-in does denote significant progress.

Domestically there were positive surprises in gross domestic product (GDP) for the second quarter and the number of idled U.S. workers filing new claims for unemployment benefits fell sharply last week. GDP, the broadest measure of all the goods and services produced in our economy, grew at an inflation-adjusted annual rate of 1.3% from April to June, the expectation was 1.2%. Not great but certainly not negative. This morning's markets are showing upticks in oil, precious metals and base metals after yesterday's washout.

How do we know if we're really doing any better? I prefer to monitor commodity prices rather than headlines to answer this question. One of the peculiar aspects of this recent downturn has been the high volatility of gold relative to key commodities. The ole Colonel examined this in his Sept. 19 Kitco commentary, "Why is Gold More Volatile than Copper, Oil or Silver?"

Here is some encouraging news: it appears gold has turned the volatility corner. From Aug. 23 to Sept. 23, COMEX gold was more volatile than COMEX copper, NYMEX oil and COMEX silver. This is an extremely unusual condition with decidedly bearish overtones. Fortunately, gold is now less volatile than all three - a more normal relation. Here are the 3-month volatility (VOL) numbers as of this morning (a number greater than 1 indicates gold is less volatile):

VOL(Cu, Au) = 1.188
VOL(Oil, Au) = 1.053
VOL(Ag, Au) = 1.232

To give this perspective, copper and oil volatilities relative to gold have hit the 4-5 range and silver has peaked to 7 earlier this year. Numbers near one denote we are now only at the very threshold of more normal price fluctuations - good news nonetheless.

Another uplifting indication is 1-month correlation. In market downturns it is not unusual to see high positive correlation across a broad range of assets due to selling pressure and outright liquidations. Copper and oil have had both negative 1-month and 3-month correlations relative to gold, another very bearish sign in the metals complex. However, the recent turn from negative to positive 1-month correlation will erode the negativity of the longer term number. If this continues we may see a return to all positive correlation which is bullish.

Here are the key correlations (CORREL) this morning:

CORREL(Cu, Au) +0.9352 (1-month) -0.3859 (3-month)
CORREL(Oil, Au) +0.7277 (1-month) -0.6696 (3-month)

And with respect to silver, we're already there:

CORREL(Ag, Au) +0.8500 (1-month) +0.8391 (3-month)

Remember when prices move together (i.e. positive correlation), commodity ratios relative to gold stabilize. The Au:oil and Au:Ag ratios have recently retreated from so-called recessionary levels (i.e. <20 bbl/oz & <57 oz/oz) at 19.73 bbl/oz and 52.9 oz/oz respectively. Au:Cu is still dangerously elevated above its warning level(>400 lb/oz) at 499.6 lb/oz but more positive correlations going forward should aid compression.

All in all, maybe we are seeing some sunlight again and less stormy weather.

Western Moly Drops

As anticipated yesterday, western moly oxide (as posted on the General Moly website) has dropped in price below the London Metal Exchange (LME) 3-month seller contract re-establishing contango. Western moly notched down to $14/lb; the LME 3-month seller is presently at $14.06/lb. Euro-moly is still at $14.30/lb but I wouldn't doubt it will fall soon too.

As reported by the Steel Business Briefing (SBB) this morning, stainless steel production in Europe is under considerable pressure. Molybdenum is a key ingredient in the manufacture of stainless steel:

European stainless demand 'will take years to fully recover'

Although European stainless steel consumption is steadily improving from its trough following the 2008 financial crisis, there is still no real growth in demand when measured against pre-recession figures.

Even as far forward as 2015, consumption in the EU will show no growth on 2007 levels, Outokumpu executive Mark Perrins, told the 4th International Stainless Steel Symposium in Birmingham yesterday (28 September).
(SBB, 9/29/2011)

Daily Market Roundup

Enough talk, let's walk the walk:

Eureka Miner's Index(EMI)

This morning the Eureka Miner's Index© (EMI) is below-par at 36.69, down from yesterday's 43.43 and below the 1-month moving average of 86.46. The 1-month average is now below the 100-level putting us solidly in bear country.

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 new low set on 9/26/2011 is 30.23. An EMI of 100 is the boundary between hot and cold markets for the metals & miners.

200-day averages are used to update mining equity norms in the EMI on a monthly basis.

Gold Value Index (GVI

The Eureka Miner’s Gold Value Index© (GVI) is above-par at 102.22, up from yesterday's 101.77 and above its 1-month average of 99.89. The Value Adjusted Gold Price© (VAGP) is $1,332.8/oz which is $297.8/oz below the current COMEX gold price.

GVI initially trended down from 6/7/2010 when it had a value of 100; gold regained value reversing the trend, moved sideways for a time and and headed back up with vigor. A sustained presence around the 100-level may prove to be a recession warning for a second dip down in the economy.

The GVI gauges the value of gold in relation to oil, copper and silver independent of currency. These three commodities were chosen for relative value comparison because 1) oil derivatives are 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 and industrial 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 Debt Crisis Watch

July 26th we introduced the Debt Crisis Index (DCI). The DCI is computed in the mornings and at the market close Friday in much the same way we do the EMI and GVI indices. Today, the DCI has a value of 227.9 up from yesterday's 211.7. Our benchmark is 100, a value of the DCI at a level above 200 is time for serious concern. We are now above that level.

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 $82.66
ICE North Sea Brent crude $104.84
Spread (ICE- NYMEX) = $22.18 (Friday, $22.87)

Here are the January contracts* with a narrower spread:

NYMEX light sweet crude $83.10
ICE North Sea Brent crude $102.98
Spread (ICE- NYMEX) = $19.88 (Friday, $20.31)

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

Prices are off their crisis highs and we have $100+ Brent and $80+ NYMEX in January favoring high oil prices throughout the late fall and early winter although we may see further pressure to the downside. My last 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 above 25; in early morning trading, bellwether Freeport-McMoRan (FCX) is seriously below its 200-day moving average of $51.92 (our new key level, 09/21 update); 10-year Treasurys are safely below 4% preserving a low-interest rate environment.

The ORANGE light is turned on for Commodity Reflation with copper trading below $3.50/lb

The YELLOW light is turned on for Stable Markets with the VIX above 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 until mid-2013

The RED light is turned back on for Investor Confidence with investors very adverse to commodity-sensitive equities

The YELLOW light is turned on our Fuel Gauge with oil above $80

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 $1.45 in early trading at $82.66 (November contract, most active); Gold is up $12.5 to $1630.6 (December contract, most active); Silver is up $0.771 to $30.845 (December contract, most active); Copper is up $0.0175 at $3.2640 (December contract, most active)

Western Molybdenum Oxide (General Moly website) is $14.00; European Molybdenum Oxide (Bloomberg) is $14.30; LME cash seller is $14.06, LME moly 3-month seller's contract is $14.06

Stock Market Morning Update

The DOW is up 226.26 points to 11,237.16; the S&P 500 is up 19.82 points at 1170.88

Miners are up:

Barrick (ABX) $46.80 up 2.03%
Newmont (NEM) $62.35 up 1.33%
US Gold (UXG) $4.05 up 1.76%
General Moly (Eureka Moly, LLC) (GMO) $2.89 up 2.85%
Thompson Creek (TC) $6.47 up 3.35%
Freeport-McMoRan (FCX) $32.54 up 0.74% (a bellwether mining stock spanning copper, gold & molybdenum)
Quadra FNX (TSE:QUX) $9.11 up 1.96%
Timberline Resources (TLR) $0.62 up 6.90%

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

ArcelorMittal (MT) $16.81 up 4.74% - global steel producer
POSCO (PKX) $80.28 up 3.73% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is up 2.41% at $1,304,328.58 (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)

Note 2 - The impact of the U.S. debt ceiling debate affected investment decisions for weeks before its resolution August 2nd and was followed by an S&P credit downgrade. Global sovereign debt issues have been an overhang on markets for many, many months starting with the Dubai crisis in late November, 2009 and spreading to the euro-zone in 2010-2011.

Headline photo 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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