Wednesday, July 22, 2009
Back to Basics for Eureka's Outlook
It is 5:59 AM, the coffee is hot and the ole Colonel is actually pleased that markets are pulling back a little this morning. As I've said before, the recent rally has caught me off guard and a sense of "too good to be true" is fortunately tip toeing back into the marketplace. I believe we need to see stable markets before any sustained rally can occur and stability means some up days, some down. Don't be discouraged, let's review the basics for Eureka's near term future:
Commodity reflation intact
Stabilizing credit and equity markets
Low inflation for the next 6-12 months
Positive trend for gold and molybdenum prices
Continued investor confidence in Barrick and General Moly
Our old friend copper is probably the best metal to show commodity reflation is still alive and well. Early trading today has copper moving closer to a key $2.50 level while other metals are down. The falling dollar isn't enough to explain the recent rise in copper and it remains a good gauge of global health. Remember that China has the greatest growth demand for copper and China's economic prosperity is a key pillar of support for recovery elsewhere.
Ben Bernanke brought up an interesting point in his testimony on the Hill yesterday. There has been a lot of fear about inflation lately with the government's so-called printing of money. Inflation is commonly described as "too much money chasing too few goods". More accurately, it should be described as "too much money spent chasing too few goods", since only money that is spent on goods and services can cause inflation. Uncle Ben reminded us that a lot of this "new" money is in bank reserves to prop up their balance sheets. Since it is not being spent, the near term threat of inflation is absent. The credit markets apparently agree since the interest rates on long term Treasurys are still low. Uncle Ben and Tiny Tim will get gold stars if they can pull the monopoly money back in at the proper moment as our economy rebounds. If their timing is off and hyperinflation occurs; angry crowds will roll them flatter than a freshly printed Ben Franklin.
Although gold is taking a breather today, we have noticed that molybdenum prices are moving nicely with a pop to $13.25 Monday. Although this is still far from the $30 plus highs of last year it is good progress from the $8 lows of April. The Colonel is willing to bet that if gold stays in the $900-$1000 range and molybdenum approaches $15 there won't be too many unhappy folks at Barrick or Eureka Moly. By the by, Tim Arnold left a comment on yesterday's blog on his whereabouts; welcome back, Tim:
"Just for clarity, Tim Arnold is now joined by his family and critters (3 dogs, 2 cats) and living comfortably in Diamond Valley. We sold the house, table saw, and old truck in Alaska, and we are now full time Eureka residents. The trips back to Alaska will have to be for friendship and to fill the freezer (you get used to that fresh halibut!). Tears, no. Joy, you bet!" (Cheers, Tim)
To close on our outlook discussion, the stock performance of both Barrick and General Moly is good which means a lot of investors believe in their future. Look at their gains in the last three months compared to the S&P 500:
S&P 500 up 12%
Barrick (ABX) up 18%
General Moly (GMO) up 50%
So buckaroos, don't worry be happy. The Colonel would rather see a dull stable summer followed by a year end rally than too much lemonade for the July picnic.
Let's ignore the ants on our cake and walk the walk:
Oil is down $1.58 to $64.03 in early trading (September contract); Gold is down $0.2 to $946.7 (August contract); Silver is down $0.048 to $13.430(September contract); Copper is up $0.0235 to $2.4745 (September contract); Molybdenum is hanging tough at $13.25.
The DOW is up 1.89 points to 8917.83; the S&P 500, down 0.45 points to 954.13. The miners are down today:
Barrick (ABX) $34.84 down 1.61%
Newmont (NEM) $41.69 down 1.33%
General Moly (Eureka Moly, LLC) (GMO) $2.34 down 0.85%
Freeport McMoran (FCX) $57.73 down 0.76% (a bellwether mining stock spanning gold, copper & molybdenum)
Steel stocks are mixed (a "tell" for General Moly):
Nucor (NUE) $44.14 down 1.05% - domestic steel manufacturing
ArcelorMittal (MT) $35.36 down 1.28% - global steel producer
POSCO (PKX) $94.09 up 0.49%- South Korean integrated steel producer
The Eureka Miner's Grubstake Portfolio is down 1.22% to $1,039.670.03
The inflation notes for today's blog were taken from our old buddy Wikipedia. The more complete explanation for all you eco-buffs:
Demand-pull inflation arises when aggregate demand in an economy outpaces aggregate supply. It involves inflation rising as real gross domestic product rises and unemployment falls, as the economy moves along the Phillips curve. This is commonly described as "too much money chasing too few goods". More accurately, it should be described as involving "too much money spent chasing too few goods", since only money that is spent on goods and services can cause inflation. This would not be expected to persist over time due to increases in supply, unless the economy is already at a full employment level.
The term demand-pull inflation is mostly associated with Keynesian economics.