A change in copper futures trading strategy could sink values of the metal to new lows and undermine the value of mining stocks. On Friday, June 1, Reuters reported that large numbers of money managers and other major speculators had taken out net short positions on copper.
When a speculator takes a net short position on a future, he is betting that the value of a commodity is about to fall. The number of copper net shorts reported on June 1 was 6,757. That's bothersome because it indicates that traders believe that a bear market in copper is imminent.
Such speculation could cause copper prices to take a steep fall because the only way that traders can make money from this is by selling their options quickly. That will drive the price down and increase the glut of the metal on the market.
Those hurt the most will be major copper producers such as Freeport McMoRan (NYSE:FCX), BHP Billiton (NYSE:BHP), Southern Copper (NYSE:SCCO), and Anglo-American Plc (NASDAQ:AAL). Freeport, in particular, could be in a very vulnerable position because it has a major expansion of its copper mining capacity under way. Expect to see Freeport's stock take a major hit if the copper bear market is beginning.
The reason speculators think that shorting copper is a great idea is obvious; copper prices have been sinking faster than the Titanic. On Wednesday, May 30, prices for the metal in London fell by 2% or $20. The reason for the fall was the ongoing European debt crisis, which is being made worse by the Spanish banking debacle. Expect copper prices to keep falling until June 18. That's the day that Greece may or may not exit the eurozone.
It is also obvious that traders don't think that the new stimulus plan from the Chinese government will help the situation much. They seem to think that the losses caused by the economic downturn will exceed any gains in the copper demand created by the Chinese stimulus. That means the Chinese stimulus will not help copper stocks recover.
Copper's Loss is Gold's Gain
There is one bright spot among all this gloom and doom for metal-mining stocks: gold prices are going up again. Gold had its biggest one-day rise in three years on Friday, June 1. The price surge was prompted by ongoing debt panic in Europe and dismal economic news from the United States. Bullion prices went up $60 an ounce by the end of trading.
Gold prices actually rose 3.5% during the week of May 28-June 1 as the economic news got worse and worse. The week began with hysteria over the Greek debt crisis and the Euro and ended with a report that unemployment had started rising again in the United States. This is to be expected because gold values always increase when the economic news is bad.
This should help major gold producers, such as Goldcorp (NYSE:GG), Barrick Gold (NYSE:ABX), Newmont Mining (NYSE:NEM), Agnico-Eagle Mines Limited (NYSE:AEM), and Anglo American. It could also help companies like Freemont make up for some of the losses that they've taken on other metals. Those companies with the biggest potential gold reserves, such as Barrick, should see the biggest gains. Expect the value of gold mining stocks to go up.
Rumors of Euro's Demise could Boost Gold Stocks
The Euro panic is particularly good for gold because it has gotten many people doubting currencies in general. Much of the demand for gold could be coming from places like Greece, Italy, and Spain, where wealthy and middle class people are afraid that their Euros could soon be replaced with worthless pieces of paper. So they are looking for a safe haven in which to park their money, and gold is a very safe haven.
If Greece, Italy, Spain, and Portugal try issuing their own currencies, again, that money will be worthless. It's doubtful that their own people will accept the new money, so there will be no way other nations will accept it. There is still a lot of money in those nations, and a huge black market particularly in Italy. Citizens there who have money will move their cash out now in order to protect their assets.
If the Euro crisis continues, and it looks like it will, the price of gold will keep going up. The interesting thing is the collapse of the Euro will be the best thing possible for gold because it will completely undermine faith in all currencies and convince vast numbers of people to buy gold.
A reasonable settlement to the Euro crisis could help gold because it will convince investors that currencies are still sound. It is likely that the Euro crisis will be settled because Greece, Italy, Spain, and Portugal need the Euro. Without it, they will be reduced to Third World status or worse. Ireland at least the possibility of rejoining Great Britain and the pound sterling, but the Southern Europeans have nowhere else to go.
The date to watch here is June 17; that's when Greek voters head to the polls for an election that will be a referendum on the Euro's fate. Greek voters face a choice between socialists, who would sacrifice the Euro for social programs, and centrists, who would preserve it. The most likely outcome is that self-interest will triumph over ideology, and Greeks will vote to keep the Euro and their jobs.
If the Greeks vote to keep the Euro, gold values and gold stock prices will plummet because the markets will see the crisis as over. If the Greeks vote to leave the Euro Zone, gold prices and gold mining stocks will skyrocket at least temporarily. Money will pour into gold (and gold stocks), as people expect another round of currency collapses.
Court Ruling could Give U.S. Environmental Officials More Authority over Miners
A ruling by the U.S. Ninth Circuit Court of Appeals could give federal officials far more power to restrict mining activities in the United States. On Friday, it was revealed that the court had ruled that suction dredge mining permits on Northern Klamath River are invalid unless they are reviewed by federal wildlife officials.
The U.S. Forest Service had approved the permits for small scale dredge mining in 2004 without consulting wildlife officials. A local Native American tribe, the Karuk, objected and filed suit because the endangered Coho Salmon lives in the river. In a seven-to-four ruling, the Ninth Circuit Court found that the Endangered Species Act requires the Forest Service to have wildlife officials review mining permits.
This ruling could have a major impact on mining projects in the United States because it could greatly increase regulation, restrictions, and delays. One dissenting justice, Judge Milan D. Smith Jr., noted that the decision effectively ends suction dredge mining on the Klamath. That means any mining project not reviewed by federal wildlife officials could have to be halted until such a review was completed.
Giant Anglo American/Rio Tinto Project in Alaska could be threatened by Ruling
This ruling could have a major impact on miners because the Ninth Circuit Court of Appeals has jurisdiction over some of the most important mining regions in the U.S. These include Arizona, Nevada, and Alaska. One major project that could be seriously impacted is the Pebble Project in Alaska. Native Americans and fishermen have objected to the Pebble because they think it could interfere with salmon spawning. Therefore, they could use this ruling as a precedent in an effort to get courts to halt work at the Pebble.
The Pebble Project is currently undergoing a watershed assessment because it is located on streams that run into Bristol Bay, a major fishing area. The U.S. Environmental Protection Agency (EPA) is conducting the assessment. Wildlife officials are apparently not involved in the assessment.
The Pebble is being developed by the Pebble Limited Partnership. Anglo American owns 50% of the Pebble Partnership, and the other 50% is owned by Northern Dynasty Minerals Limited (NYSEMKT:NAK). Around 20% of Northern Dynasty is owned by Kennecott, a subsidiary of Rio Tinto (NYSE:RIO), and nine percent is owned by Mitsubishi.
This ruling could destroy Northern Dynasty's stock value because the Pebble Project seems to be the only major resource that company has. It could also hurt Anglo-American, which has suffered losses in its platinum business and could lose its Anglo-American Sur subsidiary in Chile.
It should be noted that the Ninth Circuit's ruling can be appealed to the U.S. Supreme Court. The Supreme Court is regarded as more conservative and business friendly, so it may throw out this ruling. If that happens, Northern Dynasty and Anglo American's stock values could get a real boost.
The estimated reserves at the Pebble Project include 55 million pounds of copper, 67 million ounces of gold, and 3.3 billion pounds of molybdenum. Northern Dynasty's geologists also think that there could be an additional 26 billion pounds of copper, 40 million ounces of gold, and 2.3 billion ounces of molybdenum there. If that wasn't enough, there could also be some silver and palladium on the site.
If they can get approval for it, Northern Dynasty, Rio Tinto, and Anglo-American could have a real money maker on their hands with the Pebble. That means their stock values could be posed for major growth in the future. If the U.S. court system cooperates with them.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.