"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, October 20, 2011

Two Nice Things You Can Say about Copper & Gold; Update on Moly Prices

Copper & gold last seen at this hotel...

My latest Kitco commentary:
Copper and Gold, "What a Long Strange Trip It's Been" (10/17/2011)

My Latest International Business Times commentary: What is Up (or Down) with Silver and Gold?

This morning's...
COMEX Gold price = $1,620.8/oz (December contract most active)
Eureka Miner’s Gold Value Index© (GVI) = 101.57
Value Adjusted Gold Price© (VAGP) = $1,333.3/oz
COMEX - VAGP = $287.2/oz; gold is trading at a premium; the gold:copper ratio exceeds recession levels

Morning Miners!

It is 5:48 AM. Have a hot cup of Thor's Lightning Charge. Our favorite Norseman couldn't be happier with all the market turmoil - maybe we should send him back to Europe to straighten things out. Hmm, maybe not.

Two Nice Things You Can Say about Copper and Gold (Lately)

There isn't a lot of good news for copper and gold prices with all the commotion in Europe. Spot copper dropped another 4% before pulling up a bit this morning. COMEX copper is presently down a dime at $3.1535/lb. COMEX gold got chopped $26.2/oz to trade at $1,620.8/oz. Dennis Gartman sounded a second gold alarm this week in the respected Gartman Letter, “...the long bull market remains intact but there is no real support for gold until it trades back toward $1,550-$1,575. It may get there sooner than we think.” You can read more about his thoughts in Allen Sykora's Kitco Market Nugget:

Market Nuggets: Gartman Fears ‘Forced Liquidation’ Occurring In Gold (Kitco News, 20 October 2011, 08:16 a.m.)

Liquidations have recently shadowed the yellow metal's "safe-haven" status as uncertainty in Europe's Big Plan is shaking out investors with risky bets on equities and commodities. The fear of a worse-than-expected downturn in global growth has devastated copper with a 4-day selloff. The latest data from the World Bureau of Metal Statistics shows copper with a 312,500-ton surplus from January to August anticipating a fall in Chinese consumption. Folks were talking about red metal deficits just a short while ago.

Freeport-McMoRan's James R. Moffet, Chairman of the Board, and Richard Adkerson, president and CEO, made a joint statement in their quarterly report yesterday, “While the near-term outlook is uncertain and has resulted in a decline in copper prices over the last several weeks, the fundamentals of our business are strong and we have a positive view of the long-term market fundamentals.”

OK Colonel, what are two nice things can you say about copper and gold?

Technically speaking, copper and gold prices are at least moving together again albeit the direction is mostly down. Prices that move in tandem disturb their price ratio the least so the gold-to-copper ratio (Au:Cu), although elevated to recession levels, is showing remarkable short-term stability.

Sounds like a lot of hooey?

Perhaps, but these two conditions are necessary (not sufficient) for any hope of recovery for two of our favorite metals as the year draws to a close. The Au:Cu ratio is presently a tall 514 lbs/oz. During the worst days of the 2008-2009 financial crises, the ratio was in a range of 400-620 lbs/oz - a normal market number is 350 lb/oz. It appears we are stabilizing near the present level suggesting a pop to 600+ territory is less likely.

The 1-month ratio stability inched down to 2.94% this morning. This Report defines "very stable" as ratios below 3% (stability is the ratio standard deviation divided by its mean over that time period) . The 3-month ratio remains "divergent" at 9.88% but is lower than the 12.55% high of early October when the markets were in real disarray. If the 1-month stability remains low, it will slowly improve the 3-month number - a bullish trend.

The Au:Cu ratio stability comes from a positive price correlation between copper and gold. Here are this morning's numbers:

1- month correlation (Cu, Au) = +0.8366
3- month correlation (Cu, Au) = +0.3890

The idea is similar; a persistent 1-month high positive correlation will strengthen the 3-month correlation - a second bullish trend.

This says that gold is behaving more like a commodity than a safe-haven lately reducing the likelihood of a sudden gold price spike and deeper crash in copper prices. They could very well sag further in price. Copper and gold may check into a cheap hotel, but at least they are together. A few positive headlines from Europe could rally both metals to an uptown flat with a view.

General Moly update on molybdenum prices

General Moly's Seth Foreman gave this report the following updates on molybdenum pricing:

"Metal Bulletin as of today [10/20/11]: European Mo Oxide: $12.80-$13.10.  US Moly oxide holding at $13.50-$14.20 but I am sure that will get kicked lower in the next week or two – arbitrage opportunities don’t last forever!

Ryan’s Notes also downgraded Mo to $13.10.  Metals Week will update again today at COB.  I would expect that to move lower, too."

And from yesterday,

"Our view, however, is that at ~$12/lb you are getting to marginal cost of production, especially in China. Roca Mines shut down the other week, too."

It looks like the LME notched down a tad more yesterday also:

3-month seller $29,000/tonne ($13.15/lb)
15-month seller $29,700/tonne ($13.47/lb)

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 39.96, down from yesterday's 48.42 and below the 1-month moving average of 44.76. The new record low for 2010-2011 was set Oct. 4, 2011 at 22.88. The 1-month average is currently below the 100-level putting us solidly in bear country for the metals & miners.

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. 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 101.57, up from yesterday's 99.80 and below its 1-month average of 103.25. The new record high for 2010-2011 is 109.97 set on Oct. 4, 2011.Value Adjusted Gold Price© (VAGP) is $1,333.3/oz which is $287.2/oz below the current COMEX gold price.

The 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 price is less than 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 222.3 up from yesterday's 201.0. 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 $85.88
ICE North Sea Brent crude $108.81
Spread (ICE- NYMEX) = $22.93 (last report, $22.01)

Here are the February contracts* with a narrower spread:

NYMEX light sweet crude $86.18
ICE North Sea Brent crude $106.88
Spread (ICE- NYMEX) = $20.70 (last report, $19.93)

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

Prices are off their crisis highs and we have $100+ Brent and $85+ NYMEX in February favoring high oil prices throughout the late fall and winter.

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 $49.56(our new key level, 10/18 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 down $0.41 in early trading at $85.88 (November contract, most active); Gold is down $26.2 to $1620.8 (December contract, most active); Silver is down $0.552 to $30.725 (December contract, most active); Copper is down $0.1045 at $3.1535 (December contract, most active)

Western Molybdenum Oxide (General Moly update) is $13.50/lb to $14.20/lb; European Molybdenum Oxide (General Moly update) is $12.80/lb to $13.10/lb; LME cash seller is $13.15/lb, LME moly 3-month seller's contract is $13.15/lb

Stock Market Morning Update

The DOW is down 97.82 points to 11,406.80; the S&P 500 is down 11.56 points at 1198.32

Miners are unhappy except for Timberline:

Barrick (ABX) $43.54 down 2.81%
Newmont (NEM) $61.09 down 1.97%
US Gold (UXG) $3.78 down 2.58%
General Moly (Eureka Moly, LLC) (GMO) $2.98 down 2.30%
Thompson Creek (TC) $6.41 down 5.04%
Freeport-McMoRan (FCX) $34.07 down 0.87% (a bellwether mining stock spanning copper, gold & molybdenum)
Quadra FNX (TSE:QUX) $9.60 down 1.41%
Timberline Resources (TLR) $0.63 up 5.00%

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

ArcelorMittal (MT) $17.82 down 2.99% - global steel producer
POSCO (PKX) $77.31 down 3.61% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is down 1.96% at $1,302,944.46 (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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