"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, March 24, 2010

Whistling Dixie...What is a Strong Dollar?

Morning Miners!

It is 6:01 AM. The coffee pot is hot and we've got a great question from one of our faithful readers, "Are we really going to a slightly strong dollar for a short while?" The answer to this is a good follow-up to the Report's concern yesterday that the stocks of steel-makers, metals and miners may be signaling something troubling down the road (Are the Steels, Metals & Miners Sounding an Alarm?).

The U.S. dollar is a so-called "fiat" currency; money declared by our government to be legal tender but not legally convertible to any other thing such as gold. Most national currencies are fiat currencies, including the U.S. dollar, the euro, and all other reserve currencies. It's true value becomes a relative question. Fundamentally the U.S. dollar is worth what folks around the world believe its worth relative to a basket of other currencies or in relation to the status of our national deficit/debt.

Lately there has been much discussion about the high deficits and accumulated debt of developed nations after they tried to contain the "Great Recession" with generous inputs of government stimulus. Eventually high levels of deficit/debt can lower the credit rating of a country. This happened today with a downgrade of Portugal's credit rating sparking another bad day for the metals & miners. Similar downgrades have occurred to Greece which has been in the headlines since December of last year. Could this happen to the United States? The reader who asked today's question sent the Report this link:

Bond Buyers: Buffett a Better Risk Than U.S. Treasuries (Money News, 3/23/2010)

U.S. Treasuries, our national debt obligations, are often considered "zero risk" by investors. This is because the U.S. enjoys the highest credit rating possible and our debt has been a "safe haven" for countries such as China as well as the global investment community. The above article observes:

"Two-year notes issued by Berkshire reportedly yield 3.5 basis points less than two-year Treasuries. The Treasuries yield 0.925 percent, compared to 0.89 percent for Berkshire paper." (Money News, 3/23/2010)

This is a rare and troubling sign when a Treasury yield is more than a corporate one (yields are inversely proportional to the value of the debt instrument). No one is expecting an imminent downgrade of our national credit rating but rising yields (falling value) are not a good sign. Greece has recently issued bonds to raise money that have high yields and therefore a high "borrowing cost". If the yields of U.S. Treasuries takeoff, our national debt becomes even more a burden and the worth of the U.S. dollar will suffer (see note 1).

Of course, that's the flip side to all this. 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. This was not the case last Fall when the dollar fell to new lows and the Report wrote the article Whistling Dixie...What is a Weak Dollar? Today it is fitting to write the companion piece because the U.S. dollar has enjoyed considerable strength since mid-March pushing the metals and miners down the mineshaft. A little review from the October article:

"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...During the Bear Stearn meltdown in March of last year, the Dixie hit bottom at 70.931 while gold soared to $1,033...the index soared to 89.292 while the markets tanked in March of this year [2009]" (The Eureka Miner's Report, 10/14/2009)

OK, get the picture? The euro and the pound have been hammered lately given the sovereign debt crisis unfolding in that part of the world. Together they comprise nearly 70% of the "Dixie" so the U.S dollar rises with their decline. Most commodities are expressed in dollars so the metals and miners get whacked too.

Let's check the numbers:

Dixie (.DXY) low 3/17 79.51*; Dixie (this morning) 81.80 up 2.9%
S&P 500 3/17 1168.8*; S&P 500 (this morning) 1170.25 up 0.1%
Gold ETF (GLD) 3/17 110.2*; GLD (this morning) 106.99 down 2.8%

(* at the 1:45 PM EST intraday low for the .DXY on 3/17/2010)

What's all this gibberish mean Colonel? Yesterday we noted the steels, metals and miners have suffered since mid-March as the S&P 500 has continued to rally. The above numbers show that the U.S. dollar has beat the S&P 500 over the same time period as gold has fallen.

So what's the answer to the reader's question?

"Are we really going to a slightly strong dollar for a short while?"

Yes. As long as the European debt problems linger the dollar will no doubt trend higher with respect to the euro and the pound. If our deficit/debt problems are not faced with a good fiscal plan for recovery, this trend could reverse. In the worst case scenario, the U.S. credit rating may someday receive a downgrade too. How "short" is a "short while"? Stay tuned buckaroos.

Enough dollar talk, let's walk the walk:

4-WD is OFF - the VIX or "fear index" is below 25 but trending up, unsettled broader markets are expected; metals & miners are nervous but hanging in there with FCX 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 down $1.65 in early trading to $80.22 (April contract, most active); Gold is down $12.2 to $1091.5 (April contract, most active); Silver is down $0.387 to $16.640 (May contract); Copper is down $0.0440 to $3.3350 (May contract); Western Molybdenum Oxide sits at $16.25, LME 3-month contract is $17.28, the 15-month seller's contract is $17.46

The DOW is up 21.92 points to 10807.81; the S&P 500 is down 0.20 to 1165.61. The miners are getting beat up today (except for UXG):

Barrick (ABX) $37.65 down 3.01%
Newmont (NEM) $50.21 down 2.41%
US Gold UXG) $2.77 up 0.36%
General Moly (Eureka Moly, LLC) (GMO) $3.50 down 1.41%
Thompson Creek (TC) $13.35 down 1.98%
Freeport-McMoRan (FCX) $80.23 down 1.06% (a bellwether mining stock spanning copper, gols & molybdenum)

The Steels are hurting too, (a "tell" for General Moly & Thompson Creek):

ArcelorMittal (MT) $42.20 down 2.50% - global steel producer
POSCO (PKX) $117.17 down 0.81% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is is down 1.48% to $1,339,632.29 (what's this?).


Colonel Possum

Note 1: A vibrant growing economy, rising treasury yields and a strong dollar are not necessarily incompatible. Unfortunately we don't find ourselves in this state today with high unemployment, a heavy debt load and a tepid economic recovery.

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