"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, September 23, 2009

Uncle Ben, the Dollar, Gold & Copper

*** BREAKING NEWS *** (Fed Announcement included after the Colonel's sign off below)

Morning Miners!

It is 5:56 AM buckaroos, grab a coffee and let's figure out what's going on in the world. Let's stick to markets, that's confusing enough. Today at 11:15 AM (PDT) Ben Bernanke and the Federal Open Market Committee will make a statement on interest rates and their latest read on the economy.

Just to make your head spin with something more than caffeine, Uncle Ben is expected to announce whether they will continue with a program to buy $1.25 trillion worth of mortgage-backed securities. They have already purchased about two-thirds of that amount. Whatever happened to millions? I remember when folks thought a million dollars was a lot of dough, now we put twelve zeroes behind every government number. Maybe all this will work out honk-dory in the end.

With all the talking heads and experts these days, it is getting harder to find anyone that can express a complete idea in a few words. I found an exception today in the Wall Street Journal. Here is an explanation of recent world markets in three simple sentences:

"Confidence that the Fed and many of its overseas counterparts will keep rates low has fueled this recent stock rally. Low interest rates effectively increase the supply of money in the global economy. That dynamic helped to weigh on the dollar, which in turn boosted the prices of commodities traded globally in dollar terms." (WSJ, 9/23/2009)

That's all you need to know pardners if you need to get back to work.

If you got a little extra time, the Colonel would like to show you a few things that have him puzzled. The dollar continues on a nose dive which has lifted many dollar denominated commodities such as gold and oil. Gold, of course, is more than a commodity and behaves like a currency in hard times. A global loss of faith in our dear greenback has pushed gold above the $1000 mark.

Here's the puzzle: not all commodities have reacted as their cousins, gold and oil. We have been watching molybdenum and nickel for several weeks since they are key ingredients to steel production and therefore important indicators for General Moly (see Good Golly Miss Moly! for a more detailed explanation). Fortunately they have stopped their decline and are showing signs of stabilization. Neither has benefited from recent dollar declines.

Since March, the Report has followed the price of copper because it is the biggest canary in the global recovery mineshaft. It soared like an eagle for several months but now seems to be circling below $3 with little help from the updrafts of a diving dollar. Compared to gold, the value of copper is actually in decline. Here are several charts to illustrate my point; the first is copper (green line, HG Z9) versus the dollar index (blue line, DX Z9) for the last 3-months:

Initially, everything is fine with copper rising as the dollar declined. The rise was much more than a currency phenomenon and experts concluded global demand was on the mend. Then we hit the just-below-3-bucks ceiling and the picture is a little cloudier. One explanation is that China has stopped a metal re-stocking cycle but their recovery is intact. China is important because they have the highest growth demand for copper as well as many other metals. Here is the price of copper versus gold over the same period:

It is startling that gold's recent jump above the clouds has had little effect on our poor tired copper eagle. The last tidbit is continued shakiness in the China Shanghai stock market:

"The Shanghai Composite lost 1.9% to close at 2842.72 on worries that a likely surge in new share issues and lower bank lending in the remainder of the year will crimp liquidity.
Still, some analysts said they were confident that the government would step in to support the market if the correction went too far. Peter Lai, director at DBS Vickers, said although Beijing wants to avoid asset bubbles, it doesn't want to 'kill the market.'
'If the Shanghai Composite went below 2500, it's very likely that you would see some kind of liquidity-easing measures,' he said." (WSJ, 09/23/09).

As China goes, so goes global recovery. The Colonel will continue to watch this mysterious dragon, buckaroos. Stay tuned.

Enough talk, let's walk the walk:

4-WD is OFF (the VIX or "fear index" is low, what's this?)

Yellow light is ON for possible adverse regulation/legislation (mercury emissions)

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

Oil is down $0.19 in early trading to $71.57 (November contract); Gold is down $1.9 to $1013.6 (December contract, most active); Silver is down $0.050 to $17.065 (December contract); Copper is down $.0745 to $2.7900 (December contract); Molybdenum holds steady at $14.75.

The DOW is down 22.07 points to 9807.80; the S&P 500, down 3.61 points to 1068.05. The miners are down:

Barrick (ABX) $36.97 down 1.41%
Newmont (NEM) $44.30 down 2.03%
General Moly (Eureka Moly, LLC) (GMO) $3.42 down 2.01%
Freeport McMoran (FCX) $72.00 down 1.57% (a bellwether mining stock spanning gold, copper & molybdenum)

Steel stocks are down, (a "tell" for General Moly):

Nucor (NUE) $49.45 down 0.53% - domestic steel manufacturing
ArcelorMittal (MT) $39.66 down 0.43% - global steel producer
POSCO (PKX) $105.69 down 0.43% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is down 1.45% to $1,233,187.91(what is this?).


Colonel Possum

Headline Photograph by Mariana Titus

As reported by the Wall Street Journal after the Fed announcement today:

"Federal Reserve officials highlighted signs of economic recovery and unveiled a strategy for reining in one of the central bank's extraordinary measures to prop up the mortgage market. The Fed's policy-setting panel announced that it would extend its $1.25 trillion of purchases of mortgage-backed securities into next year in order to help financial markets adjust.

The Federal Open Market Committee voted 10-0 to maintain the target federal-funds rate for interbank lending at a record-low range of zero to 0.25%. 'Economic activity has picked up following its severe downturn,' the Fed said in the upbeat policy statement it released at the conclusion of its two-day policy meeting." (WSJ, 9/23/09)

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