Friday, October 16, 2009
The Devil, Oil, Gold & Goldman
It is 5:40 AM. Doc Titus and the ole Colonel just finished up a second cup of that famous Raine's TGIF coffee. The good Doctor prefers the red label brand, remind me to get some more. Dr. Elmer Titus joined us in the break room earlier this week and it has been a great visit (Whistling Dixie...What is a Weak Dollar?). He'll be heading over to Newark this afternoon to do a little prospecting.
Before leaving to fetch his mule he showed me another picture from the good ole days. The headline photo is Doc Titus packing a peacemaker at his Midway service station in Northern Wisconsin. The lace-up boots are no doubt from his stint in the Iowa National Guard when he chased Pancho Villa around in Old Mexico. I'm going to miss him and he leaves us with some old time advice. The Doc suggested we should go after that oil up in the north part of the County, "With all Eureka's gold, why in tarnation don't you folks get your own oil too? With gold and oil you could forget about the rest of the world and get on with life!"
There is a lot of charm in that sentiment, sadly we don't live in his world anymore.
Let's close out this week's conversation on gold and oil. It has been a record week for both with mind boggling movements in price. Low interest rates have created a newborn appetite for riskier assets and lately a lot of cheap money has been chasing oil. Gold lost some of its luster this morning with a strengthening U.S. dollar but the December oil futures got very close to $80 with a $78.17 open. Why is this startling? Let's review what the Report thought about $80 oil in the last 11 days:
October 13 - Gold peak estimate (2009) $1,080, Oil peak estimate (2009) $76.72; "Gold may be near a top at $1,080 and $80 oil before Christmas is looking 'iffy'."
October 7 - oil (fair value) $73.692; range $67.11 to to $80.27; "...oil could see $80 before, let's say, Christmas. Ouch!"
October 5 - Oil (fair value) $70.47; range $63.89 to to $77.05; "...$80 oil is not likely in the near term"
Colonel...make up your damn mind! Now that's a fair complaint readers but I'm having a hard time keeping pace with these high octane markets. My gut sense today is that we are probably near a top in gold for the year (let's stick with the $1080 number) but after the last 24 hours in the oil pits, I'd be surprised if $80 oil doesn't come home to roost a lot sooner than Christmas.
What do the smartest kids in the classroom think? Oh, who are they you ask? Why Goldman Sachs of course! The Report just covered Goldman with Meredith Whitney's recent downgrade (Where are Gold and Oil Headed for 2009?). Since then they blew everybody out of the water reporting a profit of $3.19 billion for just three months ending September 25th. To put this in perspective, Bank of America just reported a third quarter loss of $2.6 billion this morning. Goldman's share price has since declined because many think they have come to far too fast (kudos, Meredith Whitney). There is also a cloud over their decision to set aside compensation for their 31,700 employees which is on track to award an average of $700,000 apiece in 2009!
In these hard times, many think Goldman Sachs is the devil. I can understand that emotion but will steer clear of the debate. If anything, they are smart little devils. The Colonel will remind the reader what FDR said about Stalin during the Yalta conference. Quoting an old Bulgarian proverb, he remarked, "It is permitted in time of grave danger to walk with the devil until you have crossed the bridge."
In our case, the devil is Goldman; the bridge is commodities. Here is a link to an article on MineWeb on what Goldman Sachs thinks the future direction will be:
Goldman Sachs cuts commodities exposure in Q3
Happy reading, we'll talk about this more next week.
Enough talk, let's walk the walk:
4-WD is OFF - the VIX or "fear index" is below 25, smooth markets expected in the near term (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 $0.33 in early trading to $78.17 (November contract); Gold is down $3.6 to $1047.0 (December contract, most active); Silver is down $0.083 to $17.330 (December contract); Copper is down $0.0395 to $2.8195 (December contract); Molybdenum is steady at $13.625.
The DOW is down 28.49 points to 9987.37; the S&P 500, down 4.63 points to 1087.39. The miners are mixed:
Barrick (ABX) $38.99 up 0.21%
Newmont (NEM) $47.09 up 1.14%
General Moly (Eureka Moly, LLC) (GMO) $2.92 down 2.34%
Freeport McMoran (FCX) $75.49 down 0.58% (a bellwether mining stock spanning gold, copper & molybdenum)
Steel stocks are unhappy, (a "tell" for General Moly):
Nucor (NUE) $45.25 down 1.91% - domestic steel manufacturing
ArcelorMittal (MT) $39.40 down 3.76% - global steel producer
POSCO (PKX) $114.79 down 1.75% - South Korean integrated steel producer
The Eureka Miner's Grubstake Portfolio is is down 0.84% to $1,257,797.02 (what is this?).
Headline Photograph: Dr. Elmer Titus, father of Mariana Titus, near his service sation on Highway 51 in the Wisconsin Northwoods (circa 1930s).