Friday, March 26, 2010
Debt Concerns Move from Europe to U.S.
It is 5:57 AM. The ole Colonel has the Raine's TGIF Red Label brewing at double-strength, grab a cup and let's see what's going on. This week we chatted a bit about the recent dollar rally and how it has affected gold, base metals and our miners. (Whistling Dixie...What is a Strong Dollar?). I heard someone on CNBC Business News refer to the U.S. dollar as the the "least ugly" of the major currencies. Wednesday, this Report noted, "Even though we're in bad shape, if we remain better off than other developed countries, the U.S. dollar becomes 'strong' relative to their currencies."
The focus for most of this year has been on sovereign debt issues in Europe; most notably Greece, but also concerns of a contagion that could spread to other countries on shaky fiscal ground such as Portugal and Spain. Yesterday there was a key meeting of the European Union that appears to have created a safety net for Greece. As reported today in the Wall Street Journal:
"The rescue plan, which will involve assistance from the International Monetary Fund and provides Greece with a system of standby credits to guard against threatened insolvency, also brought down the cost of insuring Greek debt against default." (WSJ, 3/26/2010)
Terrific, for now at least. In the meantime things have not fared so well in our Treasury markets. We expect foreigners to participate in U.S. Treasury auctions like wide-eyed kids at the State Fair buying newly issued notes and bonds like cotton candy. This has worked for a long, long time until this week when many foreign investors poo-pooed three big U.S. Treasury offerings. The weak demand lifted the yield on the 10-year note to 3.9%, the highest level since last June.
Why should we care Colonel? Selling Treasurys is how our government finances its budget deficit. As concerns mount abroad about our ability to borrow, interest rates may trend even higher which increases the government's borrowing costs and spells trouble for the fragile housing market. Yikes.
The Wall Street Journal sums up the popular sentiment prior to the outcome of the EU meeting on Greece:
"The dollar has rallied [putting pressure on metals & miners], even as Treasurys have sold off. Usually, concerns about budget deficits send a currency lower. But investors appear to be betting on better prospects for a recovery in the U.S. than in Europe." (WSJ, 3/26/2010)
If Europe is perceived to be on the mend, investors may quickly cover this bet and our equity markets could suffer. Some believe a 4% 10-year Treasury is the trip point for when bond markets blunt the rally in stock markets.
It is too early to tell if the winds are shifting. At least for now, gold and commodities are recovering some of their losses in early morning trading. For $1095/oz gold, here are my latest ranges for silver, copper and oil:
The fair value of silver is $16.508 in a range of $15.268 to $17.748
The fair value of copper is $3.1833 in a range of $2.9026 to $3.4641
The fair value of oil is $75.869 in a range of $69.65 to $82.09
All three are presently in an "overvalued" state with respect to gold trading comfortably above fair value. This may be a bullish sign for gold prices going into next week. Here's this morning's bounce for copper:
LME copper inventories continue to decline, another bullish sign for our canary in the global mineshaft:
Stay tuned buckaroos!
Enough talk, let's walk the walk:
4-WD is OFF - the VIX or "fear index" is below 25, smoother broader markets are still in the cards; metals & miners are recovering today with FCX remsaining comfortably above $74 (what is this?)
The YELLOW light is switched back on our fuel gauge with oil above $80
An ORANGE light is ON for possible adverse regulation/legislation: Miner's claim fee, Miner taxation, Cortez Hills & mercury emissions
Otherwise, all lights are green on the Eureka Outlook Dashboard (upper right, what's this?)
NYMEX/COMEX: Oil is up $0.09 in early trading to $80.62 (May contract, most active); Gold is up $1.1 to $1094.0 (April contract, most active); Silver is up $0.069 to $16.810 (May contract); Copper is up $0.0305 to $3.4110 (May contract); Western Molybdenum Oxide remains at $16.25, LME 3-month seller's contract is $18.10, the 15-month seller's contract is also $18.10
The DOW is up 64.39 points to 10905.60; the S&P 500 is up 6.86 to 1172.59. The miners are happy today:
Barrick (ABX) $37.14 up 1.01%
Newmont (NEM) $49.00 up 1.34%
US Gold UXG) $2.64 up 1.93%
General Moly (Eureka Moly, LLC) (GMO) $3.41 up 4.28%
Thompson Creek (TC) $13.05 up 0.46%
Freeport-McMoRan (FCX) $79.18 up 1.36% (a bellwether mining stock spanning copper, gols & molybdenum)
The Steels are up, (a "tell" for General Moly & Thompson Creek):
ArcelorMittal (MT) $43.98 up 1.81% - global steel producer
POSCO (PKX) $116.24 up 0.94% - South Korean integrated steel producer
The Eureka Miner's Grubstake Portfolio is is up 1.39% to $1,324,225.54 (what's this?).
Headline photograph by Mariana Titus