"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, September 22, 2010

Will Gold Break $1300 Today or Tomorrow? Grubstake $1.5M+

Morning Miners!

It is 5:43 AM. Have a cup of hump day brew with Old Miner Woden and the Colonel. I got a kick from watching the old boy this morning, he's still over in the corner with my readers on and glued to the computer screen. Last week he told me computers don't even make good wheel chocks; today he and the internet are inseparable. What's got his interest? He's been watching the COMEX gold futures market. In the wee hours our lustrous metal came within 2-bucks of breaking $1300/oz; silver is comfortably north of $21/oz. What's behind the latest jump? One sentence from Uncle Ben...

Federal Reserve Comments Move Gold

Yesterday the Federal Reserve said it's "prepared to provide additional accommodation if needed to support the economic recovery." The Federal Open Market Committee (FOMC) said other things in their summary statement but that sentence is what has propelled gold and silver to new heights. The markets are interpreting this to mean that the Fed is prepared to do further quantitative easing (QE) in the future. In layman's terms that means simply, "print more money."

The media has coined this "QE2" bringing to mind the launching of a great ship into uncharted waters. Unfortunately, we may all be on this cruise together.

Quantative Easing (QE)

The Federal Reserve doesn't crank up the money printing presses to accomplish QE. It is much simpler, they just move a decimal point in their balance sheet. With this money they create ex nihilo ("out of nothing"), the Fed then purchases financial assets such as Treasurys and mortgage-backed securities from banks and other financial institutions. The purchases give banks the excess reserves required to allow them to loan more money, and thus (hopefully) stimulate the economy. The Fed has been buying back Treasury notes for some time from the money they made from maturing mortgage-backed securities, often referred to as "QE-lite."

What does QE mean for the metals & miners?

As you might guess, just the suggestion of further QE cratered the U.S. dollar with respect to other currencies. Since most commodity prices are expressed in our dollars, this gives a boost to those markets. Copper, for example, set a five-month high shortly after the broader markets opened. It has fallen back some but oil is also up for the day at $75.73/bbl. This Report has said many times that rising oil, copper and gold prices are the best environment for the metals & miners as long as crude oil prices don't get too crazy (less than $80/bbl, rising oil & copper prices are proxies for global growth).

There is broad evidence that tight supply/demand is presently also driving many commodities. Wheat, corn and cotton are on a roll and copper inventories at the London Metal Exchange (LME) have fallen a dramatic 31% since February (382,500 versus 555,875 metric tons, 2/19/2010). Molybdenum has remained in a tight supply with prices contained within a narrow trading range for most of the year - even through the commodity downturn of May-June.

Naturally, most miners benefit from the tight supply/falling dollar scenario. The Eureka Miner's Grubstake Portfolio has just broken the $1.5M mark this morning ($1,502,602.53) after starting with one million dollars last May. It is comprised of twelve mining and related stocks that directly or indirectly benefit Eureka County (How well is Eureka County Doing? Ask the Grubstake).

Our gauge of market temperature is the Eureka Miner's Index(EMI) which came within just a few points of its April 12th high (257.26 versus 259.35, 4/10/2010 - see below).

Can the metals & miners rally last?

Most of you are probably wondering how creating money from nothing can benefit miners in the long run. The metals & miners rebound from the depths of the mineshaft in 2009 was no doubt aided from the first round of QE together with renewed Chinese demand for raw materials. Metals such as copper were sorely in need of "reflation" from its bottom in December, 2008 ($1.30/lb). Bellwether miner Freeport-McMoRan (FCX) rose from a 12/2008 low of $16.80 to a high of $90.55 this January. This morning FCX is trading at $84.78 after dropping to $56.71 in July.

QE2 hasn't happened yet (and may not) but the mere suggestion has rocketed gold along with commodity-sensitive stocks. To answer the question of "can the rally last" really depends on where the economy goes from here. From wheat to copper, its not unreasonable to say we're entering a period of commodity inflation. One Federal Reserve mandate is to maintain stable consumer (not commodity) prices and presently they are more worried about deflation than inflation.

Here's the problem: if a manufacturer can't pass the rising prices of their raw materials to the consumer, their profit margins shrink. If the embattled consumer decides to do without rather than buy more, the manufacturer is forced to lower prices to bring their customers back. In an environment of rising input costs and falling product prices, a wicked deflationary spiral can occur. The manufacturer lays off workers and this adds to the depressed consumer base. The second part of the Federal Reserve's dual mandate is to bring us to "full employment" - now we can understand why Uncle Ben is in a pickle.

Fortunately for now, miners are at the input side of this equation and benefit from the rising prices of their product. They can continue to do well due to tight supply globally even if the U.S. economy stumbles a little. Rising oil prices could upset their ore cart but so far good. If the U.S. enters a deflationary spiral all bets are off. Most economists agree that the double-dip scenario is off the table for both the domestic and global economy for now. If we can maintain modest growth without deflation, Ben may not need to do QE and we'll all be better off in the long run. Stay tuned, buckaroos.

Daily Market Roundup

Enough talk, let's walk the walk:

Eureka Outlook Dashboard

The Eureka Miner's Index(EMI) is above-par at 257.26, up from yesterday's 243.85 and a long way from the 6/7/10 low of 50.7. The EMI high for the year was 259.35 on 4/12/2010 - the same day that COMEX copper peaked. Today's number is just above a upper trend level of 2249.95 and comfortably above support at 186.51. Remember an EMI greater than 100 is good times (or at least better times) for the metals & miners relevant to Eureka County.

4-WD is OFF - improving roads in the marketplace; The VIX or "fear index" is below 25; metals & miners are on firm timber with bellwether Freeport-McMoRan (FCX) in the mid-$80s above its 200-day average of $74.48 (our new warning level, 9/03 update); 10-year Treasurys are safely below 4% preserving a low-interest rate environment but there is still some deflationary caution now that we are sub-3%.

The YELLOW light is turned back on for Commodity Reflation. Although copper is trading above $3/lb, the 10-yr T-Note is below 3.00%

The GREEN light is turned on for Stable Markets with the VIX below the 30 level (what's this?)

The YELLOW light is turned on for Inflation/Deflation Watch as the Federal Reserve resumes buying back Treasurys and the 10-yr T-Note remains below 3.00%

The GREEN light is turned back on for Investor Confidence as investment returns to the equity markets but the bond markets still signal trouble ahead

The GREEN light is turned on our Fuel Gauge with oil below $80

A ORANGE light is ON for possible adverse regulation/legislation: Mine Safety Violations, Miner's claim fee, Miner taxation, Cortez Hills, mercury emissions , General Moly Mt. Hope Water Rights, U.S. House committee debates miner workplace safety bill

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

Commodity Market Morning Update

NYMEX/COMEX: Oil is up $0.76 in early trading at $75.73 (November contract, most active); Gold is up $21.2 to $1295.5 (December contract, most active); Silver is up $0.510 to $21.150 (December contract, most active); Copper is up $0.0825 to $3.5635 (December contract, most active)

Western Molybdenum Oxide is $15.00; European Molybdenum Oxide is $15.15; LME moly 3-month seller's contract is $16.33, LME cash seller is $16.01

Stock Market Morning Update

The DOW is down 2.87 points to 10758.16; the S&P 500 is down 1.99 to 1137.79. Miners are happy:

Barrick (ABX) $47.19 up 0.79%
Newmont (NEM) $64.69 up 0.87%
US Gold (UXG) $5.34 up 1.33%
General Moly (Eureka Moly, LLC) (GMO) $3.26 up 1.24%
Thompson Creek (TC) $10.85 up 1.40%
Freeport-McMoRan (FCX) $84.78 up 2.16% (a bellwether mining stock spanning copper, gold & molybdenum)

The Steels are mixed (a "tell" for General Moly & Thompson Creek):

ArcelorMittal (MT) $33.94 up 1.83% - global steel producer
POSCO (PKX) $111.45 up 0.96% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is is down 0.94% to $1,502,602.53 (what's this?).


Colonel Possum

Write Colonel Possum at colonelpossum@gmail.com for answers to your questions or to request e-mail updates on the market

Headline photograph by Mariana Titus

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