"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.

Wednesday, February 22, 2012

Is the Dragon Dragging? Ask Dr. Copper...

It's MY year! by Barry Keller, Ph.D. - Geologist & Artist extraordinaire

NEW FORMAT for 2012

Morning Commentary
Daily Market Roundup
- Gold & Silver Report
- Copper & Molybdenum Report
- Oil Watch
- Debt Crisis Watch
- Stock Market Morning Update
- Eureka Miner's Million Dollar Grubstake Portfolio

My latest Kitco commentary: A Foreboding Alignment in the Copper-Gold Firmament (02/21/2012)

My Latest International Business Times commentary: Gold and Silver Move Uptown for 2012 (02/06/2011)

This morning's...
COMEX Gold price = $1,753.6/oz (April contract most active)
Eureka Miner’s Gold Value Index© (GVI) = 91.93 (gold value sideways, trend indeterminate)
Value Adjusted Gold Price© (VAGP) = $1,593.9/oz
COMEX - VAGP = $159.7/oz; gold is trading at a premium to key commodities; the gold-to-copper ratio continues to exceed recession levels

Morning Miners!

It is 6:57 AM. Have a cup of Woden's Wonder Brew. Believe me, it's better than Old Miner Woden's Cold Reality java. Our market bear seems to be in pretty fine spirits today and is busy hanging up a new painting for the break room - featured as our headline image this morning, "It's MY year!".

The Chinese dragon showed up at the door yesterday, a present from our dear friend Dr. Barry Keller, geologist & artist extraordinaire. This Rock Doc is from my generation and still has the mojo to surf at his home in Chile when he is not surfing in his other abodes in Santa Barbara and San Diego. Somehow he also finds time between geological pursuits and surfing to create terrific art which includes mermaids and dolphins as well as Chinese dragons and, of course, perfect waves.

With respect to today's art, Rock Doc says:

The pencil sketch for that was actually drawn in China. The Chinese characters in the lower left were done (later) by one of the Chinese women with us [Colonel's note: Barry and his wonderful wife Rosie] on the trip and say "Golden Dragon" (or at least she SAID they did!)

The things in the dragon's hands are flaming pearls. Normal dragons only carry ONE, so this is a bit of "artistic license" (or double dipping?).

I plan to adopt today's gift as our Monday icon for the year 2012. It is appropriate because we are in the Chinese Year of the Dragon and their lunar new year kicked of on a Monday, the 23rd of January. This also was the day when planet Mars went into its present retrograde motion which will continue until April 14. Not to be outdone, planet Mercury will commence its backwards trek in the heavens March 12 and run until April 4. With these two planets in retrograde simultaneously, the ole Colonel suggests you check food and water rations in your trusty escape cave. It's a good drill remembering that the end of the Mayan long calendar and life as we know it is only 10 months away (December 21, 2012).

Is the Dragon Dragging? Ask Dr. Copper...

Commodity King Dennis Gartman often reminds us that copper and the other base metals taken collectively have a Ph.D. in economics. "Dr. Copper," as other traders refer to the red metal, is particularly savvy about the prospects for global recovery given its vast industrial and power grid applications and extensive use in new construction.

China's use of the red metal stands out since it consumes roughly 40% of the world's copper. As China goes, go goes copper and so go the markets is a familiar mantra. Copper has had a good run and is up more than 11% this year. Mr. Gartman remains bullish on the red metal and maybe that's all we need to know for now.

The ole Colonel has been swimming against this rising red metal tide and threw up a warning flare in my Kitco commentary yesterday, A Foreboding Alignment in the Copper-Gold Firmament. Maybe, I'm just getting caught up in the astrology of late.

The irony is that I refuse to listen to my own advice and am tenaciously holding on to my position in copper giant Freeport-McMoRan (FCX)!

My colleague in Mumbai is also bullish on copper, he and I did a commentary on gold this summer, What is the Value of Gold? India Beckons . Sumera Sala of Nathabhai & Sons had this to say about my present copper dilemma:

Having tracked copper prices since March 2010, the metal gave an average compounded monthly return of 0.85%. With this ROI, the price comes down to Rs.392 ($3.613 at today's dollar rate). A price below this would mean a fresh buying opportunity. As long as the cash market looks healthy, I second your thoughts and hold onto my investments but also look forward to exiting positions every time the ROI spikes over 5% towards 8% in a month's cycle given the turbulent economic conditions.

A wise man. Mr. Sala's reply came after I gave him a laundry list of my concerns:

1. I believe we are locked into what I called "Price Domain B" in my Jan. 30,2012 commentary, a period as you correctly identify as, "cautious and mostly gold-friendly"

2. Copper is probably saying, "mild recession in Europe buoyed by Germany, better-than-expected recovery in the U.S. and slowing demand in China offset to some degree by their latest central bank accommodations"

3. Much is made over here about the DOW briefly touching 13,000 today; a level not since May, 2008. I checked historical data and Brent crude was spiking up to $135+/bbl then (sound familiar?); gold was around $950/oz and COMEX copper traded at roughly $4/lb. We all know what happened next as the 2008-2009 financial crisis evolved.

4. I don't think we are currently at that frightening market threshold but high crude prices are sobering and probably kept the DOW from breaking through 13,000 at the close [referring to yesterday's close, 2/20/20120, today the DOW is still struggling to break 13,000 touching 12,977.72 at 10:18 AM ET].

5. I'm running against the crowd on the near-term prospects for copper price (e.g., Gartman Cu bullish) but I think a correction is coming.

6. As far as gold price in U.S.dollars, it seems in-line historically with oil and silver (Au:WTI 16-17 bbl/oz, Au:Ag 51-52) but not copper (Au:Cu >400 lbs/oz) => copper strength with respect to gold is required to rectify the imbalance - I think not until Iran clears.

7. Technically, the Au:Cu chart is troubling although today [i.e. 2/21] offered needed relief for copper.

So how is big copper consumer China doing? There are indications that the Dragon may be dragging given the latest downbeat export figures and HSBC PMI projections countered by a backdrop of Chinese central bank easing. Its a mixed picture but here are two articles to ponder:

METALS-Copper falls on demand concerns, China data (Reuters, Wed Feb 22, 2012 1:28pm GMT)

Market Nuggets: TDS: Lower Chinese Reserve Ratio Not Enough To Sustain Rally In Industrial Metals (Allen Sykora, Kitco News, 22 February 2012, 7:56 a.m. ET)

COMEX copper is down today but not by a lot: 2.8 cents lower at a respectable $3.8085/lb. The gold-to-copper ratio is 460.44 lb/oz; the 3-month average is 466.47 lb/oz. For my bearishness to be confirmed, the ratio needs to rise and stay above the average. So far, we're safe - maybe I should listen to Mssrs. Gartman and Sala and stop fretting about wayward planets and Mayan calendars.

Stay tuned, pardner.

Daily Market Roundup

Mining Report

This morning's mining stocks...

Barrick (ABX) $48.11 down 0.70%
Newmont (NEM) $61.36 down 0.29%
McEwen Mining (MUX) 5.55 up 0.54% (formerly US Gold, UXG)
General Moly (Eureka Moly, LLC) (GMO) $3.79 down 0.52%
Thompson Creek (TC) $8.93 up 0.22%
Freeport-McMoRan (FCX) $44.22 up 0.55% (a bellwether mining stock spanning copper, gold & molybdenum)
Quadra FNX (TSE:QUX) $14.95 up 0.13%
Timberline Resources (TLR) $0.59 up 3.51%

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

ArcelorMittal (MT) $21.4 down 2.28% - global steel producer
POSCO (PKX) $92.07 down 0.04% - South Korean integrated steel producer

The Eureka Miner's Index© (EMI) was re-calibrated 2/8 to reflect current 200-day moving averages for benchmark miners.

The EMI is above-par at 244.83, up last report's 234.35 and above the 1-month moving average of 218.89. The 1-month average is safely above the key 100-level.

The EMI gives us the market temperature for the factors that have the greatest impact on mining in Eureka County. The record 2010-2012 high for the EMI is 816.78 set 01/04/2011; the low was set 10/4/2011 at 22.88. An EMI of 100 is the boundary between hot and cold markets for the metals & miners.

Gold & Silver Report

This morning's...

COMEX gold is down $4.9/oz at $1,753.6/oz (April contract, most active)

COMEX silver is down $0.409/oz at $34.020/oz (March contract, most active)

The gold-to-silver ratio (Au:Ag) is 51.546 oz/oz

Silver 1-month CRS© is 0.70% (bullish level); CRS© convergence (Ag bullish)

The Eureka Miner’s Gold Value Index© (GVI) is below-par at 91.93, down from last report's 92.29 and below its 1-month average of 92.54. Gold value has stalled, and the trend is presently indeterminate. The record high for 2010-2012 is 109.97 set on Oct. 4, 2011.

The Value Adjusted Gold Price© (VAGP) is $1,593.9/oz which is $159.7/oz below the current COMEX gold price.

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.

Copper & Molybdenum Report

This morning's...

COMEX copper is down $0.0280/lb at $3.8085/lb (March contract, most active)

The gold-to-copper ratio is 460.44 lb/oz; ratios in excess of 400 lb/oz are considered "recession levels" (Cu bearish, Price Domain B)

Copper 1-month CRS© is 1.73% (bullish level); CRS© convergence (Cu bullish)

The latest molybdenum oxide spot and futures prices (courtesy of Thompson Creek Metals):

Metals Week Average:
As of February 20, 2012
(updated weekly)

Ryan's Notes Average:
As of February 17, 2012
(updated twice weekly)

European Molybdenum Oxide (Bloomberg average price, updated Wednesday & Friday):

London metal Exchange (LME) molybdenum 3-month seller's contract:

US$14.52/lb (US$32,000/metric ton)

Daily Oil Watch

Latest Nevada Fuel Prices (click this link)

On February 1st, 2011, we identified North Sea Brent crude oil as a good barometer for the crises in the Middle East and North Africa (MENA). The next conflict could be in the Persian Gulf. Brent remains above $110/bbl maintaining a spread above the North American benchmark, Western Texas Intermediate or "Texas light sweet crude", traded on the NYMEX.

Here are the key front-month contracts this morning:

NYMEX light sweet crude $105.94
ICE North Sea Brent crude $121.93
Spread (ICE- NYMEX) = $15.99 (last report, $15.48)

Here are the June contracts* with a narrower spread:

NYMEX light sweet crude $106.90
ICE North Sea Brent crude $120.18
Spread (ICE- NYMEX) = $13.28 (last report, $13.37)

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

NYMEX WTI 1-month CRS© is 2.49% (bullish level); CRS© convergence (Oil bullish)

Prices are near highs for 2012, we have $120+ Brent and $105+ NYMEX in June favoring high oil prices this spring into summer. A front-month spread >$20/bbl is a trouble sign, OK for now.

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 87.3 down from last report's 88.2. A level above 200 is time for serious concern. We are now well below that level.

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 and continuing into 2012.

Stock Market Morning Update

The DOW is up 3.86 to 12,969.55; the S&P 500 is down 0.93 points at 1,361.28

The Eureka Miner's Grubstake Portfolio is down 0.06% at $1,607,087.73 (what's this?).


Colonel Possum

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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