"The history of Eureka lies in its future." - Lambert Molinelli, 1878

DISCLOSURE

The author/editor of the Eureka Miner owns common shares of local mining stocks, General Moly (GMO), McEwen Ming (MUX) 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, March 14, 2012

Gold Drops $55; Copper & Silver Resilient; General Moly (GMO) on Moly

School's Out, Eureka, Nevada

Latest Nevada Fuel Prices (click this link)

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: Silver & Copper 2012 - A Tale of Two Metals (03/05/2012)

My Latest International Business Times commentary: Silver to Gold, “Whither Thou Goest…” (02/27/2011)

This morning's...
COMEX Gold price = $1,643.8/oz (April contract most active)
Eureka Miner’s Gold Value Index© (GVI) = 86.13 (gold value trending down)
Value Adjusted Gold Price© (VAGP) = $1,594.7/oz
COMEX - VAGP = $49.1/oz; gold is trading at a declining premium to key commodities; the gold-to-copper ratio remains below its 3-month average and compressing (Cu bullish)



Wōdnesdæg
Morning Miners!

It is 6:10 AM. Have a hot cup of Bad News Bears. I can't imagine a worse day for Old Miner Woden. Our market bear awoke to find his beloved gold falling down the price mineshaft while broader markets soar.

Yesterday the DOW and NASDAQ hit multi-year highs closing above key psychological levels of 13,000 and 3,000 respectively. To give that milestone proper perspective, the last time the Nasdaq Composite closed above 3,000 was Dec. 11, 2000. The S&P 500 may very well break 1,400 today. Tuesday also recorded the biggest one-day gains for the year bouncing on strong retail sales and the Federal Reserve's upbeat outlook on the economy. Most U.S. Banks passed new stress tests and have been given the all-clear for increasing dividends or stock buy-backs. Good news is bursting out all over.

Old Miner Woden just slammed the break room door - he is in full retreat to his cave. Safe-haven assets like gold and Treasuries are getting hammered as investors pile into riskier assets. When Woden and I lit the fire at 5:30 AM, COMEX gold was down $55 per ounce at an alarming $1,639.20. It has come up some now to trade at $1,643.8 per ounce. Last Friday, the ole Colonel said we may see $1,650 per ounce glitter this week - earlier today gold passed that key-level like a high-speed train.

Meanwhile, copper and silver bump down to lower prices in a slow moving ore cart - that's actually good news for them. Currently, COMEX copper is down a nickel at $3.8550 per pound and COMEX silver is off 73 cents at $32.850 per ounce. Both the red and white metal have shown recent price resilience with respect to the lustrous patriarch. The closely watched gold-to-silver ratio has compressed to 50.0 and gold-to-copper ratio is moving closer to the bull/bear threshold of 400 pounds per ounce; this morning falling to 426 lbs per ounce (the lower of either ratios indicates price strength relative to gold). I plan to write a Kitco commentary on the recent progress of both metals soon.

The broader markets are now open and it looks like we're up and away except for most mining stocks. Base metals are trading lower on a strong U.S. dollar and Chinese demand concerns. Our three benchmark miners are singing the blues - Barrick Gold (ABX) is off 3%; Freeport-McMoRan (FCX), 0.8% and Thompson Creek TC), 1.40%. General Moly (GMO) is sagging 2.3%.

It's probably my hangup but I dread bull runs led by technology stocks! I think I'll join Woden in the cave this afternoon. Before we leave the break room I did get some very encouraging news from General Moly yesterday...

General Moly (GMO) on Moly

After the dust settles from all this new found market exuberance, we'll return to our series on the benchmark miners. One key factor in our investigation is the price of their products. With respect to molybdenum, I said Monday:

Although the price moves are small, European ($14.35 per pound) and Western spot moly prices ($14.30 to $14.40 per pound) are in decline and below the London Metal Exchange (LME) 3-month seller contract at $14.51 per pound. This combination is bearish for moly miners who had been enjoying a nice trek back towards $15 per pound pasture in February. Look for LME futures prices to drop... (Eureka Miner, March 12, 2012)

Yesterday the LME 3-month contract did indeed drop to $14.06 per pound ($31,000 per metric ton). Euro-moly oxide dipped to $14.15 per pound (see report below).

I occasionally check my outlook with Seth Foreman at General Moly to make sure I'm not too far out in left field. In this case, it seems the Colonel may have wandered into the bleachers. Here is Seth's thoughtful reply to my outlook:

It’s always a bit discouraging to see the market turn lower, but I don’t necessarily see it as an indication of the relative health of the market. The market is very quiet right now – very few trades going on. Most consumers are being fully supplied under long-term contracts and are not in the spot market right now buying any material. That leaves relatively few traders to move the price up and down in an illiquid market – that is what is happening here. The same traders that drove prices higher over the last couple months are seeing the price reaching an (intermediate) inflection point and start to head lower, so traders are jumping in and taking their gains (even at $14.50 - $15). Many of these traders had inventory in the $12-13’s from late last year, so these sales are still profitable. It’s a bit like momentum traders in stocks really – not necessarily indicative of the value of the company, just people taking advantage of pricing trends and momentum.

Fundamentally, we think the high-end of the Chinese cash cost curve is in the $10-$14/lb range. That should provide a natural floor price for moly in that price range as small Chinese producers would become uneconomic and come off-line if prices were in that range for a prolonged period of time. That is what we saw in 2008-2009 and with China recently raising resource taxes on moly producers, and input costs (labor, electricity, and oil) all headed higher, Chinese cost structures are only moving up. That should be supportive of moly prices.


OK, I feel better. Seth also sent me a detailed commodity briefing by JP Morgan and pointed out that, "...they are forecasting billions of dollars to be spent on energy-supply infrastructure in the next 20 years, with North America leading the way. This is part the exploitation of our huge natural gas reserves but also the replacement of an increasingly old and decrepit energy infrastructure."

In turns out that OCTG (Oil Country Tubular Goods) tons of steel per drill well in shale is 190 tons versus 45 tons in a conventional oil well, over four times. The cool thing is that moly plays a significant role in OCTG steel. Importantly, JP Morgan ranks molybdenum as one one their their favorite metals for the 21st century.

Boy, I feel a lot better. Would somebody take the flame off those bubbling technology stocks, there's some serious moly mining to be done!

Daily Market Roundup


Mining Report

This morning's mining stocks...

Barrick (ABX) $43.99 down 3.00%
Newmont (NEM) $54.13 down 1.33%
McEwen Mining (MUX) 4.35 down 5.64% (formerly US Gold, UXG)
General Moly (Eureka Moly, LLC) (GMO) $3.45 down 2.27%
Thompson Creek (TC) $7.05 down 1.40%
Freeport-McMoRan (FCX) $38.78 down 0.79% (a bellwether mining stock spanning copper, gold & molybdenum)
Quadra FNX (TSE:QUX) $n/a
Timberline Resources (TLR) $0.53 unchanged

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

ArcelorMittal (MT) $20.54 up 0.64% - global steel producer
POSCO (PKX) $89.18 down 0.65% - 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 201.14, down from last report's 207.95 and below the 1-month moving average of 211.35. The 1-month average is falling but still 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 $50.4/oz at $1,643.8/oz (April contract, most active)

COMEX silver is down $0.731/oz at $32.850/oz (May contract, most active)

The gold-to-silver ratio (Au:Ag) is 50.040 oz/oz

Silver 1-month CRS© is 1.98% (bullish level); CRS© divergent, compressing ratio (Ag bullish)

The Eureka Miner’s Gold Value Index© (GVI) is below-par at 86.13, down from last report's 88.30 and below its 1-month average of 90.45. Gold value is now solidly trending down after briefly trending up mid-month. The record high for 2010-2012 is 109.97 set on Oct. 4, 2011.

The Value Adjusted Gold Price© (VAGP) is $1,594.7/oz which is only $49.1/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 up $0.0.0475/lb at $3.8550/lb (May contract, most active)

The gold-to-copper ratio is 426.41 lb/oz; ratios in excess of 400 lb/oz are considered "recession levels"; the ratio is below its 3-month moving average of 454.81 (Cu bullish trend emerging in Price Domain B)

Copper 1-month CRS© is 2.11% (bullish level); 1-month & 3-month CRS© < 3%, divergent, compressing ratio(Cu bullish)

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

Metals Week Average:
US$14.40
As of March 12, 2012
(updated weekly)

Ryan's Notes Average:
US$14.30
As of March 13, 2012
(updated twice weekly)

European Molybdenum Oxide (Bloomberg average price, updated Wednesday & Friday):
US$14.15/lb

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

US$14.06/lb (US$31,000/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 $120/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 $106.17
ICE North Sea Brent crude $125.77
Spread (ICE- NYMEX) = $19.60 (last report, $18.68)

Here are the June contracts* with a narrower spread:

NYMEX light sweet crude $107.20
ICE North Sea Brent crude $124.91
Spread (ICE- NYMEX) = $17.71 (last report, $17.7)

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

NYMEX WTI 1-month CRS© is 2.95% (bullish level); CRS© weak convergence (Oil neutral)

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 between Brent and WTI >$20/bbl is a trouble sign, OK for now but getting closer.

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 is 67.4 up from last report's 65.1. A level above 200 is time for serious concern - we are now well below that level. The highest level recorded since inception was 271.0 Aug. 9, 2011; the lowest level is 65.1 on Mar. 13, 2012

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 34.28 to 13,211.96; the S&P 500 is up 2.60 points at 1,398.55

The Eureka Miner's Grubstake Portfolio is down 1.57% at $1,474,024.83 (what's this?).

Cheers,

Colonel Possum

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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