Gold Rests; General Moly (GMO), Thompson Creek (TC) & Big Mo Hang Tough

My latest Kitco Commentary: Is Gold Overvalued? (08/08/2011)


Morning Miners!

It is 5:37 AM. Have a well deserved cup of Raine's Market Mover. Maybe it's the coffee but the ole Colonel believes we're coming out of this week's market storm in fairly good shape...phew!

Gold Rests

COMEX gold is presently trading at $1,747.9/oz down nearly $70/oz from the lofty new nominal price record of $1,817.6/oz set Wednesday night, August 10th. What a ride.

This is my input to Kitco's weekly gold survey:

Gold is at an unsustainable level with respect to some key commodities (notably oil & copper). As fear is reduced in the markets, gold will continue a brief period of consolidation next week. My bet is that Nicolas Sarkozy and Germany's Angela Merkel will pull a rabbit out of the hat after next Tuesday's meeting to soothe the markets but it will fall short of true euro-fiscal integration. European sovereign debt and banking woes will reemerge to support higher gold prices in the fall, perhaps sooner.

Gold needs a rest, pardner - we've come a long way!

General Moly (GMO), Thompson Creek (TC) & Big Mo Hang Tough


General Moly (GMO) got through this week's market storm intact. GMO closed last Friday at $3.99 and it's presently trading at $4.08, hopefully it will stay above $4 for the close today. This may not seem that newsworthy until you reflect that GMO plumbed $3.48 Monday in a week that nearly pushed the broader markets into bear country. The sub-$4 share price drop encouraged insider buying which is always a healthy sign.

Moly benchmark producer Thompson Creek Metals (TC) performed in much the same manner closing at $7.7 0n August 5th and trading today at $7.96 after nearly dropping below $7 on that same black Monday. TC had a blowout second quarter which you can read about in their press release which ironically came out on that same Monday:

Thompson Creek Announces 2011 Second Quarter Revenue Up 28.6% To $190.9 Million And Cash Flow From Operations Up 30% To $53.6 Million (Press Release, Monday 8/8/2011)

Thompson Creek CEO Kevin Loughrey is one of my favorite guys. I like him and Freeport-McMoRan's Adkerson because they are realistic but positive about the future - the latter saying recently, "we are prepared for success." This isn't just CEO fluff-stuff; Adkerson was one of the first to cut costs in the 2008 downturn. A faithful reader of this report sent an article along that gives Kevin Loughrey's thoughts on molybdenum pricing going forward:

Moly price to keep climbing despite market turmoil – TCM boss
(Mining Weekly, 8/9/2011)

Importantly, Loughrey is, "...expecting the price [of molybdenum] to rise this week and into next year, despite the fact that some base metals lost over 10% of their values this week."

General Moly's Director of Investor Relations Seth Foreman has expressed to this Report similar thinking that moly prices should rise in August-September. I believe we've put in a bottom too and have predicted that we will see spot moly prices break $16/lb before Halloween.

Here is the latest price action for the London Metal Exchange (LME) 3-month seller contract and spot Western moly oxide (as charted by Infomine):




An encouraging sign is that Western moly oxide spot price and the 3-month futures contarct are now the same at $15.42/lb ($34,000/metric ton).

Keep the faith, General Moly and Thompson Creek are headed higher too.


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 96.57, up from yesterday's 81.33 and below the 1-month moving average of 221.30. The EMI is down from the high of January 4th and set a new 2011 low of 74.53 on August 9th. The 1-month moving average broke its troubling downtrend on July 5th, trended up for awhile but is now dangerously trending down. Dropping below the 100-mark is a very bearish development.

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 low was set 6/7/2010 at 50.7. An EMI of 100 is the boundary between hot and cold markets for the metals & miners.

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.

Gold Value Index (GVI)

The Gold Value Index (GVI) is just below par at 95.55, down from yesterday's 99.28 and well above its 1-month average of 84.71. A new high for 2011 of 100.70 was set August 10th. Today's Value Adjusted Gold Price (VAGP) is $1,491.6/oz or a startling $280.6/oz below the current COMEX gold price.

Although gold prices have been on the rise, the GVI has trended down since 6/7/2010 when it had a value of 100; gold regained value recently reversing the trend, moved sideways for a time and and is heading back up with vigor. It is showing signs of being a little "toppy."

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 is 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 (DCI) Index to track the debt squabble in Washington and its impact on the bond, equity, currency and commodity markets. The Report will now carry it forward to track the bigger picture of domestic and global sovereign debt worries (note 2).

The DCI is computed in the mornings and at the market close Friday in much the same way we do the EMI & GVI indices. Today, the DCI has a value of 226.6 down from yesterday's 253.1. Our benchmark is 100, the value of the DCI on July 22nd; a bigger number suggests a worsening impact on markets (note 2). This Report has identified an elevated level surpassing 200 is time for serious concern. We are now dangerously 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 $86.50
ICE North Sea Brent crude $108.51
Spread (ICE- NYMEX) = $22.01 (Yesterday, $23.21)

Here are the November contracts* with a narrower spread:

NYMEX light sweet crude $87.18
ICE North Sea Brent crude $107.98
Spread (ICE- NYMEX) = $20.80 (Yesterday, $22.30)

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

Prices are off their crisis highs and we have $100+ Brent and $80+ NYMEX in November favoring high oil prices throughout the summer and into late fall although there are now signs of weakened prices. My 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 $52.93 (our new key level, 08/05 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 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 ORANGE light is turned back on for Investor Confidence with investors 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 $0.78 in early trading at $86.50 (September contract, most active); Gold is down $3.6 to $1747.9 (December contract, most active); Silver is down $0.224 to $38.445 (September contract, most active); Copper is up $0.0185 at $4.0270 (September contract, most active)

Western Molybdenum Oxide (Infomine) is $15.42; European Molybdenum Oxide (Bloomberg) is $14.80; LME cash seller is $15.42, LME moly 3-month seller's contract is $15.42

Stock Market Morning Update

The DOW is up 32.28 points to 11,175.59; the S&P 500 is down 1.06 points at 1,171.58

Miners are mixed:

Barrick (ABX) $49.58 down 0.58%
Newmont (NEM) $57.37 down 1.60%
US Gold (UXG) $6.03 down 1.47%
General Moly (Eureka Moly, LLC) (GMO) $4.08 up 0.74%
Thompson Creek (TC) $7.96 up 1.40%
Freeport-McMoRan (FCX) $46.21 up 0.85% (a bellwether mining stock spanning copper, gold & molybdenum)
Quadra FNX (TSE:QUX) $13.37 down %0.97
Timberline Resources (TLR) $0.74 down 1.33%

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

ArcelorMittal (MT) $22.32 down 0.45% - global steel producer
POSCO (PKX) $91.82 down 1.94% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is down 0.15% at $1,607,129.60 (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 (source: Wikipedia)

Note 2 - The impact of the U.S. debt ceiling debate affected investment decisions for weeks before its resolution August 2nd. The quality of U.S. fiscal plans going forward will determine if there is a credit downgrade in the wings. 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 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