Seeking Alpha

Eric Coffin's  Instablog

Eric Coffin
112 Followers
3 Following
Send Message
Eric Coffin and his brother David Coffin (http://seekingalpha.com/author/david-coffin) are the co-editors of the HRA (Hard Rock Analyst) family of publications. Responsible for the “financial analysis” side of HRA, Eric has a degree in Corporate and Investment Finance. He has extensive... More
My company:
HRA (Hard Rock Analyst) Newsletters
My blog:
hraadvisory.com
View Eric Coffin's Instablogs on:
  • What's Not to Like About Junior Golds?
     
    What’s Not To Like?
     
     
    From the October 2010 Hard Rock Analyst Journal
    David Coffin & Eric Coffin, HRA Advisories
     
    [Journal Preface]    The last month was one of those classic speculative runs that makes everyone who trades resource stocks feel pretty smart. We’re feeling kind of clever ourselves but we have been through enough markets to view self-congratulatory impulses with great suspicion. Mr Market loves hubris.
     
    The current run has been strong enough to start bringing the bears out of their short hibernation with warnings about near term collapse of markets and especially resource markets. We don’t see the backdrop for that sort of event though we do acknowledge the juniors have had it all their way for few months now. There is growing room for consolidation. On that basis alone it makes sense to be looking for opportunities to harvest some profits. Things could still move higher for a while but it’s rarely a bad idea to bring down your average costs and position yourself to do some year end shopping.
     
    All that said, our view that the Yukon Gold Play will if anything be even larger next year has not changed. For that reason we have included a longer review of a company we have mentioned at the SD level a couple of times recently.   It makes a good “Yukon portfolio” holding in its own right and will be generating strong exploration news flow next year which will add discovery leverage to the mix.
     
    What's not to like?  Well, a few things actually, but let’s start with the fun stuff. 
     
    Precious metals had a VERY good month, with gold hitting a number of all-time nominal highs and silver reaching prices not seen since the Hunt Brothers. A glance at the chart below highlights several points about the current gold market.
     

     
    Viewed on a three year time frame the gains are impressive but it doesn’t look much like a bubble. The advances have been measured and interspersed with consolidations. If the chart was laid over an S&P graph the strong inverse correlation of 2008 and early 2009 would be seen to have diminished and ultimately reversed. Gold has traded with the equity markets as often as against them lately. Clearly there is something other than just “insurance” driving the buying.
     
    The most obvious and obviously correct answer is the Dollar trade. The USD topped just about when the major markets bottomed this summer and the pullback since then has been impressive. The USD Index is off almost 14% in four months, a huge move for the world’s reserve currency.
     
    Some of that move was re-risking, though renewed bullishness about the markets is a very recent event. Mainly, the move is vote on the continued lack of progress in fixing the US economy combined with the US Fed talking the dollar down.
     
    Weak economic stats have kept money flowing into the bond market, cutting yields and making US denominated holdings less attractive. Bernanke is again talking openly about QEII which is pushing rates down even more. Falling bond yields and lending rates still isn’t having much impact on bank lending to industry and consumers but the same can’t be said for Wall St. There is little doubt that large traders are taking advantage of rock bottom rates to leverage trades. After months of being too bearish and offside, institutions seem to be piling back into the equity market. We’ve never be accused of considering those funds to be the “smart money” so we admit this move gives us pause. 
     
    In fairness however, it’s worth noting that the levels major indices are trading at are not really that bullish. The S&P is only up a couple of percent for the year and is still several percent off its April highs. Much better than the levels in mid summer but hardly levels to be viewed as irrational exuberance.
     
    One market that definitely is exuberant is the Venture Exchange, our proxy for exploration stocks. As the chart below shows, it’s been a heck of a run for the past three months. Unlike most indices it has seen new highs and is up over 15% for the year.   An impressive performance but the Venture is the Exchange most likely to be moved by metal prices and they have very much gone the right way. It’s also worth noting that so far at least the Venture has been moving up on strong volumes, something that can’t be said for larger markets.
     

     
    While the move is rational, it’s also, admittedly, large. The Yukon Gold play can take much of the credit for this. Area Plays have an outsized impact on the junior market. Indeed Area Plays have single handedly pulled that market out of the doldrums before which is one reason we’ve been focused on it.
     
    So what can go wrong? Metal prices could top out near term. We don’t think the gold bull is over, but this is a pretty long run of luck. We’re most comfortable with gold when it is backing and filling. Precious metals are due for consolidation which would cool off the Juniors too.
     
    A falling Dollar and falling yields is helping the large indices. Those who view gold as a bubble don’t see the bond market that way even though it has drawn in fifty times as much money this year. That doesn’t mean the Fed won’t try and push rates even lower if it feels compelled to.
     
    The chart below shows a good reason the Fed feels pressured to act. It compares the changes in nonfarm payrolls to the last recession in 2001 and a number of previous ones. So far the change in nonfarm payrolls is matching the 2001 curve very closely. That is not great news. It took a housing bubble to move employment last time and we know that’s not imminent. The bottom for the unemployment cycle came seven quarters after the official recession end last time. Alas, there are few reasons to think that record can be bested this time around though we continue to hope. Lower rates and a cheaper dollar are good for stocks. Many big names in the S&P have international brand franchises and a cheaper dollar expands their bottom line and helps to expand offshore sales too.
     

    None other than Alan Greenspan commented recently that better markets are good for the economy. While the irony in those comments isn’t lost on us that doesn’t mean “the Artist formerly known as Maestro” is wrong, either.  Its possible Bernanke is hoping zero rates will fluff the markets enough to improve animal spirits on their own. The correlation isn’t direct but it definitely wouldn’t hurt. We know hard money friends horrified by this concept but many in Washington and other G7 capitals are looking at charts like the one above and feeling plenty horrified already and afraid to look at their poll numbers. With fiscal measures seeming to have little impact it is understandable that central banks are falling back on a “whatever works” attitude.
     
    Not healthy, admittedly, but supportive of the market for a while longer if earnings hold up.        
     
     Positions:  None
    Ω
     
    It’s a secular bull market for metals and resources. We’ve been saying that for nine years. And we’ve been right. Another thing we’ve been right about is the growing importance of the Yukon as an exploration destination and, more recently, Area Play. HRA was there early and continues to follow several of the biggest winners in the play and is tracking dozens of others for potential inclusion in HRA publications. 
     
    CLICK HERE to access your FREE Yukon Report from HRA now! HRA initiated coverage on 15 companies since early 2009 – the average gain to Sept. 3, 2010 is 257%! 
     
    The HRA – Journal, HRA-Dispatch and HRA- Special Delivery are independent publications produced and distributed by Stockwork Consulting Ltd, which is committed to providing timely and factual analysis of junior mining, resource, and other venture capital companies. Companies are chosen on the basis of a speculative potential for significant upside gains resulting from asset-base expansion. These are generally high-risk securities, and opinions contained herein are time and market sensitive. No statement or expression of opinion, or any other matter herein, directly or indirectly, is an offer, solicitation or recommendation to buy or sell any securities mentioned. While we believe all sources of information to be factual and reliable we in no way represent or guarantee the accuracy thereof, nor of the statements made herein. We do not receive or request compensation in any form in order to feature companies in these publications. We may, or may not, own securities and/or options to acquire securities of the companies mentioned herein. This document is protected by the copyright laws of Canada and the U.S. and may not be reproduced in any form for other than for personal use without the prior written consent of the publisher. This document may be quoted, in context, provided proper credit is given. 
     
    ©2010 Stockwork Consulting Ltd. All Rights Reserved.
    Published by Stockwork Consulting Ltd.
    Box 85909, Phoenix AZ , 85071 Toll Free 1-877-528-3958
    hra@publishers-mgmt.com    http://www.hraadvisory.com
     


    Disclosure: Positions: none
    Tags: GLD, SLV, GDX, GDXJ, SPY, Junior Golds, TSX Venture Exchange, Yukon Gold Rush
    Oct 20 10:46 AM | Link | Comment!
  • Baton Toss to new powers at the Global Economic Summits


     

    Global Economics and the “Baton Toss”
     
    From the July 2010 HRA Journal
    David Coffin & Eric Coffin, HRA Advisories
     
     
    Recent conferencing in Toronto was another waypoint in the transit of global authority. The G8 (G7+Russia) economics discussion group began broadening a decade ago with creation of a forum of economic ministries. The western banking crisis pushed that larger forum to heads of government level. The long planned G8 gabfest in a wealthy enclave of Ontario’s cottage country had a city centre G20 (G19+EU) gathering appended to it. Even protest groups who claimed allegiance with emerging economies a decade ago knew G8 was but a preamble and focused on the quickly organized G20 fete. 
     
    Oddly enough the G8 doesn’t get quite the same listen now that most of its members admit to being broke. The G20 has become the main potentates’ club less than 2 years after its heads of governments first met to deal with the Western credit crunch. Does this matter?
     
    Hopefully it does. The rise of Europe half a millennia ago has reshaped the world. Our bias as ethnic Europeans living on the Pacific Rim notwithstanding, we think that has been mostly to the good. The reinstating of scientific method it produced in Europe has expanded our understanding of being, on a global basis. Now seems as good a time as any to move from that to being smarter.
     
    That would include popping the myth that cultural differences generate state level conflict. Its actually sameness that does that. Wanting the same resources and the same abilities to form them into comforting goods causes most conflict. Its true that much violence happens in the name of cultural nuance, and some would be insulted by the notion that mere goods underpin antagonism. However, even saints have to eat and the infighting tends to lighten up when there is plenty of real estate to go around.       
     
    G20 expands the cultural context surrounding economic discussion to most of the planet. This hopefully will mean eliminating culture as an excuse for economic differences. It eschews the unwieldiness of the UN system, which of course leaves some feeling left out. It is a government based forum, which leaves others feeling left out. And without question the gathering has a large measure of photo-op that could be handled by photo-shop these days. Even in Canada’s none too competitive telecom market a basket full of cell phones wouldn’t have cost a billion bucks.
     
    However, realistically these forums work when they provide the fulcrum for changes actually levered by other means — they work if they can provide politicians with good photo-ops. 
     
    What really matters with this particular gathering was that it has recognized the major geo-economic shift we are in. This is confirmed by hand wringing from the cadre who have shaped and shaded the G8. The nut of these cadres’ concern is that the new boys and girls don't understand how to presage the outcome, which could ruin the photo-op. However, the “new guys” priorities are after all new, at least in this millennium.
     
    Two of these new guys are the largest and among the oldest of functioning human cultures. China and India are the poster cultures for modern shifts away from stagnant multi-tiered class systems by, respectively, revolution and evolution. They know quite a bit about how cadres function. And everyone has lots of experience with empire. 
     
    Its entirely possible that what seemed like intransigence to the old cadres was diplomatic politeness. The new guys are all pretty much solvent. So they don't have the same focus on fixing the financial system G8 had. Ensuring fixes don’t trash the investments they have made or want to make is. A role reversal of sorts is playing out after all.   
     
    The Toronto meet made plain who are the debtors and who are the creditors. “He who pays the piper calls the tune” is understood by everyone. That message is going to get repeated, and it isn't just capital cities that should heed it.   
     
    So far there has been no real accounting for the underpinnings of the Credit Crunch. The Crunch was preceded by much touting of the system that caused it, and was followed by ample monetary support from the creditor nations who didn't cause it. Too big to fail was taken to heart, and wallet. Too big to fault wasn't. 
     
    The debtor nations are going to have to get that accounting started in earnest soon. Sound market practice was put aside to aid actors who still hold down jobs with 8 or 9 figure incomes. They continue to be regulated by the people who were dumb enough to equate those big incomes with brilliance.   This didn't have to be a talking point to be the 800 kilo gorilla at the table. Trust hasn’t been rebuilt. The debtors need it — service is their main industry and customer satisfaction will determine who gets the repeat business.
     
    “G summitry” grew out of recognition in the ’70s that coordinated regulation by the US and Europe could smooth trade in a market system. Japan was included because its economic size. Canada got a seat to balance one Italy got for the sake of EU peace. Russia was added as a post Cold War olive branch. The G8 is a trans Atlantic rich boys club, plus Japan that recreated its economy to sell into the Atlantic basin. 
     
    G8 took kudos for the long post Cold War economic expansion. That growth was mostly a lot of spy vs. spy clamps being removed from client economies, which we suppose does qualify as G7+ tinkering. Overturning the anti-empire rhetoric of the Cold War didn't have to be part of the deal, but that history didn't go away either. The G8 ought to put that reality on the table before G20 fully takes over.   
     
    Expanding to G20 world in the late ‘90s recognized a global economy was forming, but it took the Asian monetary crisis to focus this. The push to include growth economies was from North America since the Euro zone then thought its new currency was a panacea. Not so much it seems. 
     
    Conferencing is no panacea either. But the EU experiment, which is at its root a conferencing forum, has shown it can have salve old wounds for the sake of avoiding new ones. Those who bemoan the EU as a political forum pretending to be about economics ignore the reality that politics is mostly about how cash flows. Governments ignoring politics is an idea we like on paper, but also dread — when politics no longer dictates, government usually does. 
     
    No small part of China’s amazing growth story has been a changed strategy by the crowds who weren't run down in Tiananmen Square — voting with their wallets rather than their lives while those in power worried about the politics.   Twenty years later they are wealthy enough to have an audience across the street in the Great Hall of the People. By various means the same thing is happening in the other emerging economies. And as part of that process the denizens of those economies have been talking to, and working with, each other. This is why we hope the G20 will matter.
     
    The balance of this century will be about how the growth economies that have expanded the G8 into the G20 progress. The Credit Crunch has effectively sped up the commerce, and hence congress, between these growth economies. For the moment there is a degree of solidarity amongst the new group. That is left over from the old Third World concept which, not ironically, was coined by Mao as a means of creating a large enough group to force the wealthy worlds’ clubs to listen to them. Most of that Third World grouping now sits outside the G20 gathering places. The more things change….
     
    Realistically there does need to be a cap on the number of voices at the table or none of them will actually get heard (see Climate Conference in Copenhagen for a reference). For the immediate future the debtor/creditor distinctions will play a big role in defining how the new grouping operates. The official G20 meeting for 2010 will be held in Seoul this November. Since the shift from government stimuli to private commerce will either be working or failing by then, the elbowing in Seoul could say a lot about whether this new grouping can function.
     
    The last vestige of the Cold War is a two hour drive north of Seoul, and it would make sense to shift the meetings to that ironically named DeMilitarized Zone. It would remind everyone why politicians sitting down to talk about the economy makes any sense at all. If the G20 is to be important it will be because it helps prevent the creation of more Korean type DMZs. And it might prevent them amongst the new guys in the grouping. That’s why the new guys wanting G20 to turn into a good photo-op is important. Every one say “cheese please”.
    Ω
    Disclosure:  No Positions. 


    From the July 2010 HRA Journal,
    HRA Advisories

    *****

    Everyone talks about summer as a time to avoid the markets. People “sell in May and go away” but the smart money doesn’t. That’s because summer is also the time for careful bargain hunting and keeping a watch for discoveries. NOW is the time to get ahead of the market and learn about the next wave of potential winners before they become everyone else’s focus.

    HRA is not a "pick of the day" service. We focus on finding the best speculations for our subscribers. In addition to companies already followed, HRA initiated coverage on 10 new companies since the beginning of 2009. 
    CLICK HERE TO ACCESS YOUR FREE SPECIAL SUMMER STOCK REPORT!  The report includes HRA comments on four of the companies we currently follow that give you insight about the kind of company we follow and how we update our subscribers as a company's projects advance.

    The HRA – Journal, HRA-Dispatch and HRA- Special Delivery are independent publications produced and distributed by Stockwork Consulting Ltd, which is committed to providing timely and factual analysis of junior mining, resource, and other venture capital companies.  Companies are chosen on the basis of a speculative potential for significant upside gains resulting from asset-base expansion.  These are generally high-risk securities, and opinions contained herein are time and market sensitive.  No statement or expression of opinion, or any other matter herein, directly or indirectly, is an offer, solicitation or recommendation to buy or sell any securities mentioned.  While we believe all sources of information to be factual and reliable we in no way represent or guarantee the accuracy thereof, nor of the statements made herein.  We do not receive or request compensation in any form in order to feature companies in these publications.  We may, or may not, own securities and/or options to acquire securities of the companies mentioned herein. This document is protected by the copyright laws of Canada and the U.S. and may not be reproduced in any form for other than for personal use without the prior written consent of the publisher.  This document may be quoted, in context, provided proper credit is given. 

    ©2010 Stockwork Consulting Ltd.  All Rights Reserved.

    Published by Stockwork Consulting Ltd.
    Box 85909, Phoenix AZ , 85071 Toll Free 1-877-528-3958

    hra@publishers-mgmt.com   http://www.hraadvisory.com



    Disclosure: None
    Tags: Politics, Global Economy, G20, G8
    Jul 18 7:10 PM | Link | Comment!
  • Golden Goose vs. Black Swans
     
    From the May 2010 HRA Journal
    David Coffin & Eric Coffin, HRA Advisories

    (Note - sent to HRA Subscribers as part of the JRA Journal on May 6, 2010)
     
    April ushered in both broader evidence of recovery in parts of the Western economy, and a series of both ecological and economic “events” that are quite worrisome. It’s unlikely any of the April events (including, we fervently hope, sovereign debt) would be, in and of itself, shattering. What each does is to impact the psychology under which markets are operating and hence how they perform. The cumulative impact of these events after a strong uptick means sell buttons are being pushed, and should be signaling profits taking by you. How much is the question.
     
    The notion of an event impacting markets hard isn’t news. In the last decade both the 9-11 destruction of New York’s twin towers and the flooding of New Orleans by Hurricane Katrina made the list. The Black Swan by Nassim Taleb that became popular after the Credit Crunch meltdown emphasized the concept. We would emphasis, however, that a 9-11, Katrina and the Credit Crunch are different birds. 
     
    The 9-11 attacks were a calculated attempt to disrupt western commerce. They worked because, like any high impact terrorist act, they were a surprise. The timing deepened a recession that was ready to get underway and broadened the bear market the Tech bubble ushered in. They have cost $trillions in added security cost and 10s of thousands of lives to war in a broad protracted aftermath. 9-11 earned the Black Swan Event moniker.      
     
    Katrina was an event to be expected though also impossible to time. Most of the region picked up and carried on as it had after similar weather borne destruction. Human suffering was largely immediate.   The impact to New Orleans was exceptional. It hasn't really recovered from its failed levee system after five years. One immediate impact was to underscore resource scarcity for oil, plus zinc and other metals for which the city acts a warehousing/transport hub. That helped set up crazy oil prices, but the event had little broader impact   The Credit Crunch was/is an event that fit perfectly into the financial model Taleb uses in his (now) popular short fund. That would seem to make the Crunch an obvious Black Swan Event. It was, however, another difficult-to-time event like Katrina rather than a true surprise like 9-11. Many could see the bubbles forming and warned about them. The timing of the Crunch will be a marker for the economic turning point from western to eastern centers.   Right now it feels like that marker is being called.              
     
    Since it got underway over two and a half years ago, the credit crunch seems less like a black swan and more like a slow motion train wreck. That is especially true of late. The crisis gripping parts of Europe has been brewing for months. Like drivers who realize too late they won’t make a corner, markets are reacting to seemingly implacable forces they can’t seem to avoid.
     
    There are several worries that relate specifically to the metals sector. China’s moves to slow the pace of growth appear to be working. That’s good in the long run if it allows China to avoid its own bubble. The obvious downside is this could mean a near term slackening of demand that is showing up in metal prices.
     
    The second is the Australian government’s plan to boost taxes on the “excess profits” of mining firms. To the obvious impact on companies working in Oz is added the realization that other jurisdictions could make similar moves. This is a topic we have touched on in the past and is certainly no black swan for us. 
     
    Its no secret to resource sector participants that others think deposits magically appear without thought or effort on the part of mining companies. Many governments see resource extraction as some sort of “free lunch”. When the sector has periods of high profits they must, by definition, be “excessive” and fair game for revenue hungry governments. 
     
    Obviously this raises the bar that determines what is economically viable by increasing the average cost base for commodities. Part of the reason cheap oil is over is a revenue sharing structure that sets a high base price for anything coming out of the well. Following a similar model in the mining business will simply help ensure metal prices stay high.
     
    The big worries right now of course are European.   Most of these have been visible for a while but had been “normalized” through the last year of market recovery. Most of the EU did not deal with anything but emergency debt issues and let longer term problems fester in denial. However, they have built one on top of an another until its impossible to ignore the pile’s abnormality.
     To wit:
     
    The sovereign debt of Greece has been labeled junk and is now yielding at the same level charged by mass mailing credit cards.  Portugal’s debt rating is now slipping away, and Spain is looking increasingly shaky. The €110 billion bail out for Greece with EU/IMF funding is large. Yet Greek workers are tossing rocks in protest. What they would toss if Germany’s parliament refuses to ratify its portion we don’t know. 
     
    Frustration is understandable, but the reaction of the Greek populace borders on delusional. The nastier the backlash, the less likely it is that bond buyers will believe Greece is willing to take the necessary steps. Without some faith in the bond pits, interest rates in Greece will stay at levels that all but guarantee a debt spiral even with a bailout in place. 
     
    Many Club Med citizens are remembering the “good old days” when they could devalue their way out of spending crises and print the money to pay back old debts. If reason doesn’t prevail, the core countries in the EU may have to cover some bank debts directly and give rioters their wish by cutting them out of the EMU. Definitely one of those “be careful what you wish for” scenarios that we really hope does not come to pass.
     
    An Icelandic volcano shut down most European air traffic for five days and is increasing its activity again as this is written. This volcano can spew for months at time, and has often signaled its bigger neighbor is about to awaken. The disruptions to air traffic going forward aren’t likely to be as severe, but it will make travel planning tougher and more expensive to deal with. Just another headache for Euroland.
     
    A South Korean warship mysteriously sinks, and evidence increasingly points to a North Korean torpedo as the cause. Since North Korea is mum on the subject, the best case would seem to be that a lower ranking nutcase was responsible rather than the “Dear Leader”. 
     
    A presumably lone nutcase who fortunately had limited skills plants a bomb in Times Square. It didn't explode and is not likely to damage the city’s image. One wonders if it was actually heading for Wall St and just happened to begin sputtering in mid Main St. We take a little comfort from that thought since we’ll be speaking at a conference across the street next week.
     
    A BP oil well in the Gulf of Mexico blows out and is seriously leaking. So far damage to the Gulf seems to be relatively limited, but few immediate solutions are at hand. The impact on further such oil production will at a minimum be higher capital costs to ensure problems of this sort can be dealt with more quickly. Washington only recently opened up a number of offshore areas to new drilling. An ill wind blowing the wrong way could ensure these areas get closed again.
     
    A writ has been filed against Goldman Sachs and a young VP. It alleges that a synthetic CDO was filled by the worst possible mortgage crap with the aid of a client who intended to short it.   Regardless of whether this is judged illegal or not, the ethics at work is going to cause further questioning of how financial markets function. Goldman is the big dog on Wall St. Most of its clients didn’t seem too concerned about its proprietary trading as long as the gains were there. This case could give a lot of those clients second thoughts. Reformers will now have a freer hand to do their work and those voting against financial reform bills will have to explain why, even if the bills are silly. Whether new legislation will actually help is another question. 
     
    Most events like those above can be dealt with individually without terribly serious market disruptions. The potential of sovereign default will always shake things up since banking gets hurt which can lead to severe domino effects. Greece’s debt is large enough to matter internationally, but only just. It’s concern for southern Europe as a whole that is the real issue in this case. The ability of a country to escape a debt spiral is directly correlated to the interest rate the market demands for its debt.  Even if the PIIGS enforce credible spending cuts they can still be trapped in a spiral if lending costs don’t settle down. There is no way we know of to legislate this since its basically about trust.
     
    Financial cotangents are mostly about lost confidence. Despite large gains for some assets since the Crunch, confidence hadn't really returned at large enough scale to deal with a pile this size right now. Most of the European banking sector has made much less serious efforts to write off and recapitalize than banks in the US. That may now be forced on them. If recent bond yields and share prices for southern European banks are any guide, the equity injections will be public again rather than private. 
     
    Markets reflect the common consciousness. That isn't a philosophical musing, but merely a fact. If this pile gets any larger markets will continue to retreat. We try to regularly remind that profits taking should be an on going part of dealing with what are generally high risk stories. Hopefully you have taken note.
     
    The $6 Billion?
     
    Now that base metal prices are in decline, the next question is more obvious. How much is enough? The continuing puzzle of what size of copper inventory markets can handle comes down to that. LME stockpiles have dropped by well over 15% since late February, as have the much smaller Comex stocks. In Shanghai the copper stockpiles have grown by almost 30 Kt in the past month, which offsets about half the LME declines. All of the SHFE metal stocks are growing right now, and stockpiles of other mineral goods are flat lining. Shanghai’s stocks continue to auger the global price picture.     
     
    The decline in western stocks may indicate a reluctance to sell metal when it appears western economies are mending. Added availability in China could relate to fresh indications the Yuan is finally going to be allowed to rise as much as it is efforts to slow growth starting to take root. For now, holding Yuan is a Dollar hedge if it is going to rise. 
     
    Regardless, copper’s price has become unstuck from its $3.50 per pound ($7700 per tonne) waypoint. Both prices and stockpiles are in decline, as we had expected would happen at some point. It’s too soon to call this a trend since the last 50 cents or so of gain looked like froth that needed blowing off. We do think the “new-normal” can now establish itself.
     
    The listed copper stockpiles are currently valued at about US $5.5 billion, down from about $6.2 billion a week ago. A decade ago when stockpiles held about 50% more metal than today they were valued well below $2 billion (about 65 cents per pound) in the midst of a bear market. That is the seeming disconnect we have been concerned about. But then, these days a billion here or there is chump change.  
     
    The copper stockpiles are valued at about seven or eight days of trading in Freeport McMoran.   Its not unusual to hedge producer shares by going into futures market for the metal. Futures pricing on the LME for copper rises, slightly, out to the 15 month slot. That on its own could be holding the spot price up. 
     
    It’s also true that smelters are having a tough time contracting as much concentrate as they'd like. As we’ve noted before the overbuilding of smelters in China has caused an upstream capacity glut, and smelters have cut charges to the bone to ensure they can maintain supply. Asian smelters often supply other units in the same conglomerate. That makes the issue of supply maintenance a critical concern that could also bring more long buyers to the futures market. 
     
    None of this means the copper price is going to move back up. If sentiment shifts towards a short circuiting of the western recovery, or the Asian boom, copper would continue to pull back with everything else. 
     
    Copper producers are trading at levels established before copper’s last up leg. Either the possibility of a broader down turn had still been weighing on them, or market ratios are changing. Though we think the former is most likely, this is the wrong time to be concerned on which is the more important. For the time being we continue to be more focused on warehouse changes than on price for all the base metals.   That and Mediterranean bond prices.  
     
    The Other Currency
     
     
    The chart on this page shows the gold price over the last decade measured against a basket of five currencies (the Canadian and US Dollars, UK Pounds, Euros and Yen. It’s a good indication of how strong the recent move has been when you stop thinking in dollars. Gold has not seen new all time highs in $CAD or $US and yet the chart above shows a clear upward breakout. The chart for Euros or pounds is much more impressive and gold has been moving up against all currencies.
     
    All of this is another way of saying gold is trading like a currency which means its trading on its own against all currencies. There have been a number of recent sessions where gold had strong upward moves in the face of falling stock markets and a surging dollar. This is quite different from the pattern two years ago when gold was falling 30% as markets panicked and the Dollar surged. Currency trades never happen isolation; you are always selling one currency to buy another. In the past month we think much of the new money entering the gold market is coming out of the Euro which has been crashing hard.
     
    This is different from straight “fear buying” and has the potential to be more long lasting and fundamental in its aspect. Those that have expected gold to falter whenever the markets showed some strength lately have been disappointed. 
     
    Gold’s trading pattern has changed several times in the past few years and it can certainly change again. Nonetheless, the market now seems set up for a challenge of last year’s all time high which bodes well for gold stocks. 
     
     
     
     
     Disclosure:  No Positions.
     
     
     
     
    Ω

     
     
    The HRA – Journal, HRA-Dispatch and HRA- Special Delivery are independent publications produced and distributed by Stockwork Consulting Ltd, which is committed to providing timely and factual analysis of junior mining, resource, and other venture capital companies. Companies are chosen on the basis of a speculative potential for significant upside gains resulting from asset-base expansion. These are generally high-risk securities, and opinions contained herein are time and market sensitive. No statement or expression of opinion, or any other matter herein, directly or indirectly, is an offer, solicitation or recommendation to buy or sell any securities mentioned. While we believe all sources of information to be factual and reliable we in no way represent or guarantee the accuracy thereof, nor of the statements made herein. We do not receive or request compensation in any form in order to feature companies in these publications. We may, or may not, own securities and/or options to acquire securities of the companies mentioned herein. This document is protected by the copyright laws of Canada and the U.S. and may not be reproduced in any form for other than for personal use without the prior written consent of the publisher. This document may be quoted, in context, provided proper credit is given. 
     
    ©2009 Stockwork Consulting Ltd. All Rights Reserved.
     
    Published by Stockwork Consulting Ltd.
    Box 85909, Phoenix AZ , 85071 Toll Free 1-877-528-3958
    hra@publishers-mgmt.com    http://www.hraadvisory.com
     
     
     


    Disclosure: Disclosure: No Positions
    Tags: GLD, BDG, BOS, SPY, UDN, UUP, Black Swans
    May 20 8:07 PM | Link | Comment!
Full index of posts »
Latest Followers
Posts by Themes
apocalyptica, Area Plays, Asia, Baltic Dry Index, base betals, Base Metals, basic materials, Black Swans, China, China Banks, coal, Commodities, commodities, Commodities., Commodity prices, Copper, copper, copper gold china iron ore Toronto Stock Exchange, Emerging Markets, Eurozone Debt Crisis, Exploration stocks, Financials, G20, G8, Global Economy, gold, Gold, Gold Stocks, India BRICs, iron ore, Junior gold stocks, Junior Golds, market cycles, Market Direction, Market Outlook, Market trends, Mergers, metal prices, Mining, Nickel Iron Ore, Politics, Precious Metals, S P, shipping, Sovereign Debt Real Estate Bubbles, Stock market, Tas loss selling, Trade, TSX Venture Exchange, TSX Venture index,
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.