Gold Drops $44; General Moly (GMO) Comments on Market Retreat

Morning Miners!

It is 5:53 AM. Ruby T has both pots brewing this morning, you may need a strong one pardner...

Gold Drops $44

It's funny how the thing you fear is not usually what gets you. The world has been focusing for weeks on the possibility of oil supply disruption given the turmoil in the North Africa and the Middle East. This drove futures contracts above $100+/bbl for both Brent and NYMEX crude oil. As a safe haven play, gold regained a very tight positive correlation with black gold and ventured back into $1440+/oz country. Just last Monday, COMEX gold posted a new record of $1445.7/oz. COMEX Silver, arguably the better performer than gold (i.e. recent extremely low gold/silver ratios), posted on new 31-year high of $36.745/oz on the same day.

With last week's earthquake and tsunami in Japan, oil demand destruction trumped supply disruption fears and oil headed back to earth. Gold and silver followed oil down but all three commodities held up reasonably well yesterday. NYMEX Oil dipped below the $100/bbl watermark briefly but closed at $101.19/bbl. COMEX gold and silver stayed within a reasonable range of their new highs closing at $1424.90/oz and $35.840/oz respectively.

The increasing fear and uncertainties surrounding the damaged nuclear reactors at the Fukushima Daiichi plant proved to be too much for these brave markets. When Japanese Prime Minister Naoto Kan said there was a high risk of elevated levels of radiation following a third explosion at Daiichi, oil prices tumbled along with Japan's main stock index which fell 11%. This triggered a global sell-off of risky assets which continues this morning. Here is a good overview from Reuters:

COMMODITIES-Markets buckle; Japan crisis sparks risk aversion (Thomson Reuters ,Tue Mar 15, 2011 12:09pm GMT)

Although gold is thought of as a safe haven play, speculators sold bullion to cover losses in riskier investments. Liquidations caused gold to drop $44 from yesterday's close by 08:30 ET on the COMEX. Thankfully gold and silver have recovered some, presently trading at $1389.1/oz and $34.005/oz. Needless to say the mining sector is getting hammered...

The Eureka Miner's Index sets new low for 2011

The broader markets are now open and there is a broad sell-off with the DOW now down 245 points to 11,747 and the S&P 500 down 29 points to 1,267. The Eureka Miner's Index(EMI) fell to a new low for the year of 262.0, the old low was set last Thursday at 271.3. We started the year at a lofty 816.8 and it has been pretty much downhill ever since. The EMI gives us the market temperature for the factors that have the greatest impact on mining in Eureka County

General Moly (GMO) opened at $4.47 shortly after the open but has recovered to $4.65 presently. Bellwether miner Freeport-McMoran (FCX) fell well below its 150-day moving average of $49.5 to hit a low of $46.53 before rebounding to $47.74. Nuts.

General Moly Responds to Market Slide

It is always good to have the proper long term perspective when markets experience sharp downturns. Yesterday I asked General Moly Investor Relations Director Seth Foreman if he would give the Report his most recent thoughts on world events, the molybdenum market and his company. The ole Colonel is very grateful for his thoughtful response:

"It has been a very turbulent series of weeks and the disaster in Japan is terrible, the magnitude of which is almost incomprehensible. It seems that the nuclear reactor situation has taken a turn for the worse over night, obviously driving a massive sell-off in the equity markets this morning.

Specifically to GMO, we have reached out to Sojitz, one of our off-take partners. Sojitz offices are in Tokyo and they report little damage and that all staff are well, although one of our contacts spent Friday night in his office due to lack of public transit.

In the short term, the sell off may continue. I had the sense that the market was in 'rally mode' (both equity and moly prices) for a long time and that traders have been transitioning into a 'sell the news' mode over the past several weeks – almost looking for excuses to get out of positions. This is certainly an opportunity for them.

For us, it is important to focus on the long term, especially since we aren’t in production. There seems to be some optimism that the rebuilding of Japan will be a net positive for the global economy and the steel market particularly. Any short-term negative impact to global moly demand from Japan will likely be small and surpassed by long-run strength as infrastructure in Japan is re-built stronger, newer, and with better steels.

As you know, moly intensive steels are widely utilized by the nuclear industry. Judging from the price reaction of uranium prices and uranium producers, the market seems to believe no nuclear facilities will ever be built again. However, I highly doubt that – China has already announced plans to construct 27 nuclear facilities and other countries, including Japan, have plans to develop many more. Regardless of how the nuclear power situation in Japan turns out, the rest of the world (perhaps ex-USA) is a believer in nuclear power and is pushing ahead with plans to build reactors – a net positive for moly. However, even if Japan were to move toward coal or natural gas plants, those still use high moly content steels, so our industry is probably okay either way frankly.

Hoping that the Japanese can get control over those reactors!"

(Seth Foreman, Director of Investor Relations, General Moly, 3/15/2011, 7:22 AM PT)

Daily Oil Watch

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. The most active front month contract remains 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 this volatile region.

Here are the key front month contracts as of this morning:

NYMEX light sweet crude $97.86
ICE North Sea Brent crude $109.23
Spread (ICE- NYMEX) = $11.20 (yesterday $13.39)

Here are the June contracts with a narrower spread:

NYMEX light sweet crude $99.43
ICE North Sea Brent crude $109.17
Spread (ICE- NYMEX) = $9.74 (yesterday $11.53)

Although prices are off their crisis highs, we still have $100+ Brent in June favoring higher prices for the summer if supply disruption fears outweigh demand destruction fears in the oil markets. The Colonel's December prediction that we would see NYMEX $100/bbl oil before the Fourth of July came true on February 23rd.


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 262.02, a new low for 2011 - down from yesterday's 325.65 and well below the 1-month moving average of 465.56. The EMI continues to be down from the high set on January 4th and a trend reversal in the short term is now unlikely.

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 greater than 100 signals better times for the metals & miners relevant to Eureka County.

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.

Eureka Outlook Dashboard

4-WD is ON - The miners are in a real rough patch; The VIX or "fear index" popped above 25 briefly at 25.72; bellwether Freeport-McMoRan (FCX) is below its 150-day moving average but still above its 200-day average of $44.85 (our new warning level, 03/04 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 as the Federal Reserve resumes buying Treasurys (aka QE2)

The GREEN light is turned back on for Investor Confidence as investment returns to the equity markets

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

Otherwise, all lights are green on the Eureka Outlook Dashboard (upper right, what's this?)

Commodity Market Morning Update

NYMEX/COMEX: Oil is down $3.30 in early trading at $97.86 (April contract, most active); Gold is down $35.8 to $1389.1 (April contract, most active); Silver is down $1.835 to $34.005 (May contract, most active); Copper is down $0.0765 to $4.1100 (May contract, most active)

Western Molybdenum Oxide is $17.00; European Molybdenum Oxide is $17.60; LME moly 3-month seller's contract is $16.90, LME cash seller is $16.69

Stock Market Morning Update

The DOW is down 245.67 points to 11,747.49; the S&P 500 is down 28.97 at 1267.42

Miners are getting clobbered

Barrick (ABX) $49.54 down 2.86%
Newmont (NEM) $51.11 down 2.33%
US Gold (UXG) $7.10 down 5.46%
General Moly (Eureka Moly, LLC) (GMO) $4.65 down 6.44%
Thompson Creek (TC) $11.50 down 5.27%
Freeport-McMoRan (FCX) $47.74 down 2.43% (a bellwether mining stock spanning copper, gold & molybdenum)

The Steels are in the slag heap (a "tell" for General Moly & Thompson Creek):

ArcelorMittal (MT) $33.43 down 4.53% - global steel producer
POSCO (PKX) $104.28 down 3.21% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is is down 4.09% at $1,696,342.81 (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 (Wiki).

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