"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, October 14, 2009

Whistling Dixie... What is a Weak Dollar?

BREAKING NEWS: The Dow Jones broke 10,000 at 10:21 AM (PDT) today

Morning Miners!

It is 5:59 AM, grab a cup and let me introduce you to a horseman, prospector and adventurer, Dr. Elmer Titus. The headline photo shows a young Elmer leaving South Dakota for Kansas City in the days when a "long ride" was just that and didn't involve looking for the next Stuckey's on the Interstate. Elmer served in the Army as a stable Sergeant in an Iowa cavalry unit and rode into Mexico on the heels of Pancho Villa with General Pershing and (at the time) First Lieutenant George S. Patton, Jr.

He later opened several garages in the Northwoods of Wisconsin and participated in the hunt for Chicago gangster John Dillinger as a town constable. Elmer's prospecting career was in the Southwest, the gold bug must have bit him there during his army days. He operated a small gold mine in Hillsboro, New Mexico, until 4 ounce/ton ore was no longer economical to transport to the mills in nearby El Paso. Can you imagine? We get excited about 0.1 ounce/ton grades or less in these parts!

In the 1940s, Elmer switched from gold to oil and worked in the booming oil fields of Venezuela. He met and married Ana Allen Perez there and started a family fairly late in life. Elmer and Ana returned to the States with two small children where he studied Chiropractic at the Palmer Institute in Iowa. He started a practice in southwest Louisiana where the family grew to six children. Pardner, they don't make'em like Doc Titus anymore! Unfortunately, the ole Colonel never met him but I am very proud to have married the second of his children, Mariana Titus.

I thought about Elmer this week as the Report ponders the near term fate of gold and oil. I am sure he would be mad as hell to learn that the recent rise in both is largely due to a weak U.S. Dollar. Having lived when a greenback was backed by gold and strong as a pack mule, I'm sure Elmer would have trouble understanding $1000+ for the yeller stuff and a national currency that seems to lose value every day.

Everyone talks about the "weak U.S. dollar" these days so I thought we'd explore just what that means. Dollar strength or weakness refers to its relative performance with respect to a basket of currencies. The standard of comparison is the U.S. Dollar Index (USDX or .DXY) or in currency trader slang ,"Dixie". The USDX was created March 1973 and is comprised of the following currencies and base weights:

Euro 57.60%
Japanese Yen 13.60%
British Pound 11.90%
Canadian Dollar 9.10%
Swedish Krona 4.20%
Swiss Franc 3.60%

At inception, the Dixie had a level of 100.00. As we have exported great wealth over the years the index has declined. Yesterday the Dixie hit a 14-month low of 75.63 as gold pegged a high of $1,070.40 on the London spot market. Early this morning the poor Dixie dropped further to 75.44. During the Bear Stearn meltdown in March of last year, the Dixie hit bottom at 70.931 while gold soared to $1,033.

OK, OK...enough already. It is equally important to point out that the index soared to 89.292 while the markets tanked in March of this year. Investors and governments ran to the dollar as a safe haven when fear was high. Now, they have abandoned the poor greenback with a voracious appetite for riskier assets. The Report looks at the so-called "fear index" or "VIX" (.VIX) everyday to decide whether to switch on 4-WD for bumpy markets (see below). It turns out there is a high correlation between the VIX and Dixie and both are at new lows as equities and commodities continue to move upward. Greed has replaced fear my friends.

As we enter yet another day of new highs in the stock market, the Colonel will continue our discussion of gold, oil and the greenback for the remainder of the week. Let me leave you with this thought. With nearly a 60% weight, the euro dominates the Dixie. There is only one commodity-sensitive economy in the mix, Canada, with the Canadian "Loonie" contributing less than a 10% share. A belief that the dollar is headed for the depths of the mineshaft implicitly assumes there will be a more robust recovery in the European Union (EU) than that anticipated for the U.S. Presently, the EU is comprised of 27 countries and may soon be led by the indefatigable Tony Blair. As the Economist reported this week:

"...Britons must stomach the prospect of Mr. Blair 'suddenly pupating into an intergalactic spokesman for Europe', in the phrase of London's Tory mayor, Boris Johnson." (Economist, 10/10/09)

Even though on paper the EU is a larger economy now than the United States, do we really believe that 27 disparate countries in Europe (possibly) led by Tony Blair will outstrip American innovation and productivity? I just heard Elmer Titus roar, "Hell no!"

Don't give up faith on our greenback buckaroos. When a little fear and reality returns, Doc Titus and George will smile again. Stay tuned, more to come.

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 up $0.78 in early trading to $74.93 (November contract); Gold is down $2.8 to $1062.2 (December contract, most active); Silver is up $0.030 to $17.870(December contract); Copper is up $0.0395 to $2.8340 (December contract); Molybdenum is steady at $13.625.

The DOW is up 110.49 points to 9981.55; the S&P 500, up 13.12 points to 1086.31. The miners are mixed:

Barrick (ABX) $40.19 up 0.73%
Newmont (NEM) $47.42 down 0.55%
General Moly (Eureka Moly, LLC) (GMO) $3.06 up 4.43%
Freeport McMoran (FCX) $76.19 up 1.79% (a bellwether mining stock spanning gold, copper & molybdenum)

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

Nucor (NUE) $45.67 up 2.06% - domestic steel manufacturing
ArcelorMittal (MT) $40.18 up 4.26% - global steel producer
POSCO (PKX) $114.42 up 4.97% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is is up 1.92% to $1,269,672.65 (what is this?).


Colonel Possum

Headline Photograph "Elmer Titus", father of Mariana Titus

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