A Stronger Dollar for 2010?

Morning Miners!

It is 6:07 AM, grab a cup and let's warm up. If Uncle Sam appeared on the Suze Orman Show he'd get a pretty bruising lecture on reducing his household debt. He wouldn't be alone, there are a bunch of European countries in the green room waiting their turn for a tongue lashing by T.V.'s financial counseling Diva. National debt in developed countries has gone ballistic to assuage the Great Recession and is having a major impact on the relative value of currencies and the price of gold. Hold that thought, especially the word "relative".

Suze Orman advises households to compare their household debt to annual salary to determine their financial outlook. She reduces hapless guests to tears when the ratio of debt-to-salary approaches 100% or greater. Suzie exhorts, "Honey, you're technically bankrupt!"

It isn't too different for countries. The national debt as a percent of Gross Domestic Product (GDP) has been used as a measure of economic viability since wagons had wheels. At the end of World War II this ratio was highest at 121% (1946); presently the United States sits at 90% (2009) and is expected to approach the dreaded 100% mark next year and exceeding that by 2011. Below is a chart from 1900 to the present and you can checkout the numbers for yourself at the government website:


U.S. Government Spending


Now, how about our European friends? This is an important question because the euro has been recently strong against the U.S. dollar and comprises 58% of the dollar index (a basket of currencies used to gauge "relative" dollar strength, Whistling Dixie...What is a Weak Dollar?, 10/14/2009). The British pound sterling weighs in for another 12% so the European region plays a very important role in determining the worth of the greenback.

So how are those folks doing? On the surface it seems that the Euro area is doing slightly better than ourselves with an average debt-to-GDP ratio of 88% projected for 2011. Looking at individual counties things are not quite so rosy, here are some of the big'uns (note 1):

Greece 135%
Italy 118%
Ireland 96%
Portugal 91%
France 88%
Germany 80%
Spain 74%

The accumulation rate of debt (deficit) is also important; here are the same players with projected deficits as a percent of GDP for 2010:

Greece 12%
Italy 5.5%
Ireland 15%
Portugal 8%
France 8.5%
Germany 5%
Spain 10%

Greece, Ireland and Spain are headed for trouble; S&P and Fitch gave Greece a significant credit downgrade this week. We're in the credit rater's cross hairs too along with the Brits:

Moody's Investors Service warned that the U.K. and the U.S. need to rein in their deficits in order to hold onto their triple-A credit ratings. The agency also set the U.S. and U.K. economies apart from other top borrowers, labeling them "resilient," in contrast to Canada, Germany and France, which are seen as "resistant." (WSJ, 12/8/2009)

So what's the Colonel's point? This week the U.S. dollar has rallied and gold has fallen given emerging concerns about the true health of the European continent. As I said earlier, "relative" is key to understanding who's doing better in a kennel full of sick puppies. I believe we'll convalesce a lot quicker than some of our friends across the pond which bodes well for the dollar in 2010. The ole Colonel remains bullish on America; stronger dollar, improving economy.

Enough talk, let's walk the walk:

4-WD is OFF - the VIX or "fear index" remains below 25; smooth road market conditions expected (what's this?)

Yellow light is ON for possible adverse regulation/legislation: Cortez Hills & mercury emissions

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

Oil is down $1.11 in early trading to $72.82 (January contract, most active); Gold is down $14.8 to $1149.2 (February contract, most active); Silver is down $0.435 to $17.925(March contract); Copper is down $0.0430 to $3.1660 (March contract); Molybdenum is steady at a notch above $11.

The DOW is down 80.94 points to 10309.17; the S&P 500 is down 7.88 points to 1095.37. The miners are still grumpy:

Barrick (ABX) $41.36 down 2.54%
Newmont (NEM) $51.14 down 1.34%
General Moly (Eureka Moly, LLC) (GMO) $2.19 down 1.80%
Freeport McMoran (FCX) $77.35 down 1.70% (a bellwether mining stock spanning gold, copper & molybdenum)

The Steels are down, (a "tell" for General Moly):

Nucor (NUE) $42.60 down 0.91% - domestic steel manufacturing
ArcelorMittal (MT) $39.77 down 0.40% - global steel producer
POSCO (PKX) $121.41 down 2.85% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is is down 1.37% to $1,250,353.08 (what is this?).

Cheers,

Colonel Possum

Note 1: Data source - The Economist 11/21/2009

Photograph by Mariana Titus (Eureka, 2006)