Nickel prices are on the edge. They have been falling impressively since May 2007, from their peak posted at $US 53,995 a tonne. A consolidation phase followed between August and May 2008, and then a second phase of large decline has started and is still going today. However prices fell back to support levels that may end this bearish trend.

First, the long-term chart shows the big picture. The price action has recently cleared on the downside (point D) the long-term support that was expected to become a new basis for a rebound. This long-term support is the dash line, which goes through the high prices posted in January 1995 (point A), in march and May 2000 (point B). This resistance was cleared on the upside in October 2003 and became a new support (point C) in May 2004.

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The recent break below this long-term support, set around $US 10,000 per tonne, should have been a powerful bearish signal. However prices posted a low at $US 8,810 on last October 24 and then suddenly jumped back one week later at $US 12,625, crossing back above the long-term support.

They closed two days ago at $US 9,760 on the LME. This succession of moves around the important level of $US 10,000 indicates that the market has not yet chosen the way it will go. A trend reversal following those false breaks may be possible as well as a further decline over the coming weeks.

The MACD argues for positive development. It bottomed on October 24 and curved upward. The bullish positive signal that it triggered in the last week of October remains valid.

An upward move is may also be possible as the volatility is currently quite low. The Standard Deviation indicator shows low values which signifies low volatility; the Nickel prices are remaining close to their moving average. Typically, low Standard Deviation values (therefore low volatility) tend to come before significant upward price changes.

Typically, major tops are normally accompanied with high volatility and major bottoms are generally calm with low volatility. A retracement of the recent huge decline (-72% between March and the low of October) is likely.

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In this scenario, the target for the bulls should be the level of $US 13,000. Indeed this is the level of the main resistance which goes through lower highs posted since the beginning of the bearish trend generated last year (points A, B and C). It means that a bounce back roughly 33% higher is expected.

On the downside, the new support (bold blue line) is at $US 8,000. This is a previous high (2001 and 2002) that became a new low in 2003.

The Reuters/Jefferies CRB Commodity Index, the commodity price benchmark made up of 19 commodities (petroleum products, base metals, agricultural products…) has continued its broad decline started in early July.

In our last update (MM of October 23) we were mentioning that commodity prices had tumbled to a four- year low today, at 266 points (point C on the chart), and that a further move downward was likely as the indicators were clearly bearish.

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The price action actually hit the following expected support level at 230 points It means that the CRB has lost more than 50% of its value in 5 months (between points A and B on the weekly chart). This new support level at 230 points is a previous high point posted in October 2000 (point C), then in January 2001and in October 2002 (points D and E). Once this resistance was cleared, it became a new low and the inflection basis point for the bullish trend development that started in March 2003 (point F).

The RSI shows that the CRB is clearly oversold now. Therefore technically, the current support level may be an opportunity for a bounce back. But as long as the RSI does not jump above its signal line and gets out of the oversold area, there is no positive alert triggered. Consequently the price action can potentially decline further with a RSI that remains oversold during several weeks.

A break of the current support would open the door towards the historical low levels posted in February and July 1999 (points G and H) and in October 2001 (point I), when the CRB bottomed at 182 points. Roughly it’s a further 20% fall from the current levels.

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On the daily chart, we see that the immediate resistance during the large decline generated last July is the 30-day moving average. If the support at 230 points holds (yesterday the closing price of the US session was 233.35), the Fibonacci retracement ratios are likely to become the price objectives.

Over the last 10 years, lead has been traded between $400 and $4000 per tonne on the London Metal Exchange (LME). Because of its toxicity, lead usage restrictions have been decided in different places in the world, which should have weighed on prices. However, lead was the best performing metal on the markets in 2007 because of the huge Chinese demand of batteries and because the market is controlled by a few big groups (72% of world lead consumption is dedicated to batteries for automotive and industry sectors).

In 6 months in 2007 prices doubled. They have been multiplied by 7 in 4 years, with an historical high price on October 15 last year at $3,980 a tonne. However they have been experiencing a large decline since this date. They lost more than70% of their value as a low has been posted in late October this year at $1,140.

The last two weeks, the price action has rebounded by 33% after it has hit the support line (point D on the chart) of the bearish trend started last year. Indeed, this support line goes through the lower lows that have been posted since August 2007 (points A, B and C).

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The indicators are bullish as the MACD and the technical Momentum indicator are well-oriented and argue for a further rebound.

However traders like to complete trends before generating a new medium to long-term trend in the opposite way. The bearish completion would occur here if prices fall to $825, which correspond to the low posted in 2005 and would act as a new support basis. Rebounds have already occurred in the past (points B and C especially) but failed to reverse the bearish trend. That’s why it is likely to be one more time a technical rebound that may not end the current long-term decline.

In this scenario the two first resistances will be a test for the current rebound. The first one is just there, around $1,550, as it was the previous low posted in early July (point C). It could be the new high now as traders often fill the gap and then move back in the other direction. The other resistance is around $1,700, for the same reasons: it was the low posted in August.

If the price action fails to breakout those levels, a pull-back towards $1,000 then to $825 is probable.

The Reuters/Jefferies CRB Commodity Index is a commodity price index created in 1957 and currently made up of 19 commodities (petroleum products, base metals, agricultural products…). It has a critical role as a transparent and widely available benchmark for the performance of commodities as an asset class.

In our last update of August 13, the bearish technical indicators were arguing for a further move on the downside. At this time the CRB index was trading at 385, and the expected target for the correction pullback was 363, which was a key Fibonacci ratio. The price action eventually fell below this level as it posted a closing low price at 341 on September 16.

A strong rebound has already driven the Index back to 366, the closing price yesterday. Investors consider that the correction that occurs on the global commodities markets has been too strong in a relatively short-time frame. Despite the lower demand worldwide generated by a slowing economic growth, the financial credit crisis and the action plan decided by US authorities is likely to make the US Dollar plunge. That’s why, as a mechanical hedge against the decline of the Greenback, the commodities have bounced back sharply.

Three days ago (September 22), surging prices for oil, silver, soybeans and gold sent the CRB Index to its biggest gain in more than five decades.

All 19 commodities in the index gained. However the very next sessions should be choppy as the price action has just reached a first resistance line. This resistance is built by the lower high points (points C, D and now E) posted since the beginning of the retracement initiated in early July (point A).

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Between A and B, the CRB fell by 28%. Despite the recent bounce back, the price action has failed to cross above the medium-term resistance line at 374, which also corresponds to the 23.6% Fibonacci ratio of the 2 months-and-a-half-decline, and to the 30-day moving average. There are consequently 3 good reasons for traders to sell back the CRB.

However the technical indicators have turned bullish therefore a further upside move is probable. The RSI showed that the CRB was clearly oversold, so did the Commodity Channel index that is now well oriented on the upside. The MACD has triggered a bullish signal last Friday.

If the current price development succeeds to clear the resistance level and to jump above 375, the next targets would probably be the next Fibonacci ratios, therefore 390 (38.2%) and 405 (50%).

 

As smart money will sooner or later flight back into resources-related stocks, there are on the ASX many opportunities to take advantage of this expected flight-to-quality. Sino Gold Limited (ASX:SGX) is an Australian company involved in the exploration, development and production of gold exclusively in China. The company is primarily focused on the development of the Jinfeng Project.

As many other commodities-related stocks, SGX has suffered from the broad decline of the tangible assets those past two months. But it had also declined between March and May, while the equity markets were sharply rebounding. The fact is that Gold prices was effectively retracing from the peak posted above $1,000 an ounce. As a result, there is a strong positive correlation between gold prices and the SGX price development. The chart shows the SGX price action (black bars) and the Gold price action (red line).

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Many indicators argue for a strong rebound of the Bullion, in the current context of financial crisis and uncertain business climate. Actually Gold price has soared this week, it posted the biggest gain ever posted in one day on Wednesday, as the credit market turmoil convinces investors to pull their money out from equities and to put it back in safe-haven assets. What is safer than Gold?

An ounce is now trading around $850. It means that Gold has rebounded by 15% in 10 days after it posted a low at $740 on September 11. Regarding SGX, a few positive signals have been triggered and argue also for a further rebound. This may be good vehicle to take advantage of the Golden come-back.

The stock actually lost 66% of its value between the historical high posted in last March, at $8.81, and the recent low posted last week (at $2.95). The stock had been obviously oversold and a retracement has already started.

The MACD just triggered a bullish signal this week, as it crossed above its signal line. So did the Money Flow Index, which is an oscillator that accounts for volume action. It shows that smart money flies back into the stock. When price and volume both move on the upside, it’s a good sign that a bullish momentum is building up, and that a positive trend may be possible.

The stock closed at $4.40 this Friday. A significant retracement of the recent decline (between point A and B on the chart) has already driven above $4.3 (23.6% Fibonacci ratio) as the first objective. However a trend is likely developing: $5.2 then $5.9 would become the main immediate targets (38.2% and 50% retracement ratios).

A leading Chinese company has been given approval to lift its shareholding in Murchison Metals. The Federal government’s decision will see Murchison shares jump today on the ASX. Murchison shares jumped 10.9% in Friday’s big surge to close up 12c at $1.22. They had been weak for the last few weeks as investors have gone cold on resource stocks and Sinosteel moved to mop up Midwest. Now it can switch its attention to Murchison. Sinosteel has a 2.6% stake in Murchison, but close to 20% is controlled by the Harbinger hedge fund of the US. It delivered control of Midwest to Sinosteel last week by reversing its opposition to the Midwest bid and accepting the Sinosteel cash offer. There was no mention of board representation for Sinosteel on Murchison in the event it gets to 49.9%, the maximum allowed under the Government’s decision, revealed yesterday. That maximum level is also a hindrance because it can’t get to that level by making a full bid. It can acquire it gradually, but that could take years. But the Government’s decision means Sinosteel has also been allowed to tighten its control on the Mid-west iron ore province east of Geraldton in Western Australia. The Federal Government has green-lighted an application by Sinosteel Corporation of China to acquire up to 49.9% of Murchison Metals, but not control, according to a statement from the Federal Treasurer, Wayne Swan yesterday. Mr Swan said that he made the ruling under the Foreign Acquisitions and Takeovers Act 1975. It had been expected for some time and came less than a week after Sinosteel secured control of rival Midwest Corporation and moved to compulsorily acquire the outstanding shares in Midwest. Sinosteel had previously sought to acquire up to 100% of Murchison, which was the subject of an Interim Order under the Act. Sinosteel withdrew that application after some opposition was voiced. Mr Swan said that “there have been significant developments since the original application was made.

 

“The Western Australian Government recently awarded rights to construct new port facilities at Oakajee to a joint venture between Murchison and Mitsubishi Corporation.

“It is also considering proposals to build new railway lines to link the iron ore deposits in the Mid West region to the port.

“Sinosteel has recently acquired more than 97% of Midwest Corporation Limited which has iron ore deposits adjacent to Murchison’s.

“Midwest and Murchison have previously sought to merge their operations by takeover proposals that did not proceed.

“The Government welcomes foreign investment in Australia and I will continue to ensure that investments are consistent with Australia’s national interest.

“The Mid-West region may ultimately become a significant new source of iron ore exports to the north Asian iron and steel markets.

“Murchison is an emerging iron ore miner with deposits in the region.’

Mr Swan that that “In determining this application, I have determined that a shareholding of up to 49.9% in Murchison will maintain diversity of ownership within the Mid West region.

“The Government considers the development of such potentially significant new resource areas should occur through arrangements that are open to multiple investors.

“This approach is consistent with the national interest principles we released in February and with the approach I have outlined previously, including in discussions with my Chinese counterparts.

“The Government’s objective is that development of our considerable natural resource endowment occurs in a manner that allows Australia to remain a reliable supplier in the future to all current and potential trading partners.

“This ensures the maximum development of our resources and a fair return to all of the Australian community.”

Sinosteel had offered $6.38 a share offer for Midwest.

The acquisition was the first successful hostile Chinese takeover of an Australian company and became possible after Murchison’s former Midwest deputy chairman David Law and US investor Philip Falcone (Harbinger) agreed to the offer at the last minute early last week.

It sounds like more of the same from the past few weeks: sharemarkets rattled, financial stocks rattled and commodities on the slide. 

Well, it was up till Friday when it suddenly became a very different story.

And this morning, a switchback, with oil under the $US100 a barrel mark in New York trading early today as damage from Hurricane Ike wasn’t as bad as feared.

The US dollar fell Friday as the slide in the euro came to an end; the Australian dollar bounced a couple of cents; gold, copper and several other commodities rose and Hurricane Ike was the big influence.

But the big question was whether Friday’s bounce was due to Ike coming ashore and apparently not leaving too much damage to the oil and gas producing, refining and distribution facilities along the Texas coast between Houston and Galveston.

At least 13 refineries in Texas were shut for the passage of Ike.

That was 3.64 million barrels a day of refining capacity.

But as we have seen after storms in the past month, once the situation is clarified, then the prices of oil, petrol and gas will ease quite quickly.

And that’s what seems to have happened after Ike as oil fell in early electronic trading in new York to $US99.25 after dropping to $US98.75 a barrel early this morning, our time.

The October New York contract briefly dipped to $US99.99 on Friday, falling under the $US100 level for the first time since April 1.

But Nymex crude in New York rose 31c to close at $US101.18 a barrel.

In London, October Brent North Sea crude eased 6c to settle at $US97.58 a barrel.

Oil prices are down $US47.29 a barrel since the peak of $US147.47 on July 11.

For all the sound and fury of Ike, the real story remains the continuing dip in American consumption of oil-based energy products.

US energy consumption is down 3.8% over the past four weeks compared with the same period in 2007, while petrol consumption is down 2.1%.

 

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On the Chicago grain markets, the emphasis is shifting as the harvest gets underway and the yields of wheat, corn, soybean and other crops becomes clearer.

The United States Department of Agriculture said on Friday that the hugely important corn harvest won’t be as big as thought because of widespread dry, warm weather last month.

The USDA said farmers will harvest 1.8% less corn than forecast last month, while the soybean harvest will be down 1.3%, but wheat output will be higher in both the US and globally.

The USDA forecasts steeper increases in corn and soybean prices, which have eased from the record levels set earlier in the year.

December corn rose 30 USc, or 5.6% on Friday to $US5.6325 a bushel in Chicago. That pushed prices up 2.7% this week. That left the price of the most active contract down 30% from the all time high of $US7.9925 in late June.

November soybean futures rose 26c, or 2.2%, to $US12.02 a bushel in Chicago. The price rose 2.1% last week. Beans are down 27% from the all time high of $US16.3675 hit in early July

The USDA said the average cash corn prices in the crop year that began September1 were $US5.50 a bushel, compared with $US5.40 estimated in August and $US4.20 in the most recent year.

The Department said cash soybean prices will average $US12.35 a bushel this crop year (which started on September 1), up from last month’s estimate of $US2.25 and up from $US10.15 in the previous year.

 

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Wheat was the odd one out with prices falling for a third straight week after the USDA made no change in its estimate of US domestic stocks in the coming year, suggesting that there might be more grain than the market thought.

The USDA said it expects US carryover stocks on May 31 (the end of the wheat crop year) will be around 574 million bushels, while exports will total 1 billion bushels, matching the forecasts made in August by the USDA.

December wheat futures fell 7c to $US7.1925 a bushel on Friday, down 4.3% over the week and 19% this year.

The USDA also increased its estimate of global production to a record 676.3 million tonnes, up from last month’s forecast of 670.8 million tonnes.

Canadian farmers will harvest 25.4 million tonnes, up slightly from the August forecast of 25 million tonnes; European Union output will be 147.2 million tonnes, up from 143.2 million tonnes in the August forecast and these will offset declines in Australia and Argentina: Australia will produce 22 million tonnes, down from the 25 million tonnes in the August forecast and Argentina growers may harvest 12.5 million tonnes, 1 million tonnes down on the August estimate.

According to the USDA’s forecast, the US is expected to be the largest exporter of wheat, followed by Canada, Russia, Australia, Ukraine and Argentina.

 

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Copper had its best week in three, rising sharply on Friday as the US dollar lost ground against the euro.

Comex December copper futures added 7.15 USc, or 2.3%, to $US3.194 a pound. The price was up 3.1% last week

The metal climbed from Wednesday-Friday, as signs of declining mine output increased concerns that supplies may be tight next year. Some analysts, especially at Citigroup, are forecasting demand to run ahead of production next year.

Copper was also supported Friday by a fall in Chinese stocks.

Stocks overseen by the Shanghai Futures Exchange dropped 29% to 13,554 tonnes, the lowest level since 2003.

On the London Metal Exchange, three month copper rose $US192, or 2.8%, to $US7,122 a tonne, or $US3.23 a pound.

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Gold jumped Friday, ending a nine-day losing streak, thanks to the US dollar’s fall against the euro.

The euro rose as much as 1.5% against greenback, but ended off 0.3% for the week.

The Australian dollar finished at $US82.36 in New York, up from $US80.48 in Sydney on Friday afternoon and $US81.64 in Sydney the week before.

It was a rare gain for the currency, the first for a month or more over the week and the strongest daily performance for weeks.

Gold fell 4.8% over the week, despite a $US19 dollar an ounce rise on the day.

Comex December gold rose $US19, or 2.5% to $US764.50 an ounce in New York. The metal had fallen 11% from the end of August to last Thursday

Silver also had a rare rise, finishing up 24c, or 2.3%, to $US10.795 an ounce for the December contract. The metal still dropped 12% last week and is down 28% this year.

Gold is down 26% from the record $US1,033.90 reached in March and is off 8.8% in 2008.

 

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Far from Over: A Short-Term Correction
in the Commodities Bull Market Provides
Opportunities to Late-Comers and
Savvy Investors

Commodities, especially oil and gold, are in a correction. But make no mistake: We’re NOT at the cusp of a bear market. On the contrary, smart investors should take advantage of currently depressed prices to aggressively accumulate shares in select precious metals and energy companies.

Since hitting an all-time high on July 3, 2008, the benchmark Reuters-CRB Index has declined 20% while crude oil prices have tanked 25%. Other commodities have declined even more. And gold stocks, as measured by the XAU Gold & Silver Index are down a blistering 35% since June.

Admittedly, the recent peak in oil prices was extreme, if not symptomatic of a short-term “bubble.” The same was true for most commodities where institutional fund-flows were manic in the hunt for positive returns the first six months of 2008.

Commodities have been the prime recipients of a global institutional boom. We’ve seen more commodity exchange traded funds this year. Also, hedge funds have been pouring money into commodities as managers searched for one of the few remaining profitable market segments in an otherwise horrible year for equities and bonds.

So Much for the “Big Trade”

The “big trade” over the last 12 months for hedge funds has been riding the wave in commodities, including oil and shorting or betting against financial stocks. And that trade reversed violently in July.

But while the market is right to discount a slowing global economy, it’s wrong to assume that the bull market in oil and most other commodities is over. You simply can’t make a case for the death of the bull when short-term cash rates are still below the rate of inflation and global money-supply (M-2) is growing in excess of almost 20% year-over-year, according to Grant’s Interest Rate Observer.

It seems as though investors who don’t remember the lessons of history are doomed to commit the mistakes of the past.

Remembering the 1970s Correction

Commodities are extremely volatile. Knowing that, it’s flat-out ridiculous to call this decline “a bear market” just because prices are down 20%. Oil, gold and other commodities plunged by almost 50% in the mid-1970s during the bull market. Then commodities went utterly gangbusters by 1980. Commodities can decline sharply even in a secular bull market.

But what about the U.S. dollar and its impressive 360-degree turn since mid-July against all major currencies? Isn’t that a bad omen for commodities? No. Longer term, the dollar is relegated to the dustbin as a laundry list of deficits hamper any serious gains or bear market rallies.

What’s amazing here is that everyone is running to buy dollars when the United States is still accumulating out-of-control deficits.

The Treasury’s budget deficit in July nearly tripled to US$102.77 billion, up 182% from July 2007. But what difference does it make? The U.S. just spends like crazy and the rest of the world finances this ponzi-scheme. It might not be this year or next year. But at some point, there will be a global crisis in confidence as America’s debt-to-GDP ratio, already at 6%, just explodes to uncontrollable levels.

But it’s not just budget deficits that threaten the dollar. There are also trade deficits as far as the eye can see. We’re also seeing two seemingly endless and expensive military conflicts. We have bulging social entitlement spending programs that have yet to peak. Not to mention, we have to finance more expensive financial institution bail-outs including the costly nationalization of Fannie Mae and Freddie Mac. The list goes on and on…

How can a sensible investor not own gold and other tangibles in this madness?

In order for the United States to support all of this profligate spending it must expand credit or print money. And printing this sort of money – a colossal amount – will ultimately result in much higher inflation in 24-36 months.

Central Banks Are Determined to Stoke Inflation and That Will Benefit Commodities

Any way you slice it, this has been a bruising correction for commodities. But don’t call it a bear market. Commodities, unlike stocks, are far more volatile and can record daily price swings that are extremely wild – exceeding 5% or even 10% in a single day.

But bull markets in commodities don’t end with negative inflation-adjusted interest rates or with global money-supply (M-2) expanding at more than 20%. In the 18 years I’ve been in this business I’ve never seen credit expand at this rate – never. This tells me world governments are growing desperate to grow inflation amid a deflation in credit expansion and real estate. It’s inflate or die for the world’s central banks.

The next few months might continue to be painful for commodities. We are probably more than 50% of the way through this correction now with many commodities still in net supply deficit.

The way I see it, investors are confused because they can’t identify the current stage of the economic cycle. Are we still in an inflationary surge or is this the beginning of global deflation?

It’s this seemingly new direction in asset prices since mid-July that has triggered a wholesale run on commodities and an up-crash for the dollar. It’s been lightning fast and many investors are getting mauled.

It looks like the world economy is starting to deflate after a big post-2002 expansion. The forces of inflation and deflation are now fighting each other for the first time since 2001 and ultimately, inflation will win. If it doesn’t then the banks, financial markets, housing and everything else that revolves around finance and credit goes into the gutter.

Time to Print Like There’s No Tomorrow Again

Central banks are aware of this, especially Bernanke, a devout Great Depression scholar.

For the Fed and other central banks the strategy is to rescue the global financial system from the economic abyss or deflation. That means they’ll print credit like there’s no tomorrow. The Fed, the European Central Bank, the Bank of Japan and their international buddies are going to accelerate the expansion of credit to avoid a devastating deflation. Inflation will triumph.

The world still needs oil, it still has to drill for oil and gas, and gold production won’t grow for at least another 24 months amid ongoing supply disruptions in South Africa and Australia.

Oil drilling, major oil producers and gold mining stocks are my favorite long-term growth themes within the resource complex and are incredible purchases right now. Energy and gold mining stocks are incredibly attractive at these bombed-out levels and should be aggressively accumulated. Also, the offshore oil drillers are down by a quarter since July and are still home to the best profits in the energy patch.

Price developments change very quickly on commodities markets these days. For instance, copper. In our last update, on August 15, we said, “the technical indicators are still bearish. The previous intermediary support (around 7,850) could be the immediate resistance for the current new rebound. Investors would then be tempted to test the long-term support of the triangle and pull the price back towards 7,200 or 7,100.”

Less than one month later, the price has cleared the long-term support line on the downside (that goes through points A and B on the chart). As a result, the bearish sentiment strengthens and will probably drive the price even lower in the coming weeks. The price closed at $6,860 a tonne 2 days ago on the London Metal Exchange (LME).

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What is going on?

Copper has fallen 22 percent from the peak of $8,775 posted on June 30, as increasing stockpiles signalled weaker demand. Imports of copper and copper products by China fell 4% in August compared with July.

Another element that has an impact globally on commodities markets is the recovery of the US Dollar. Remember that despite the exchange being based in London, copper is priced in US Dollars. A rebound of the Greenback therefore reduces the dollar-priced investments.

The price had moved within a long-term indecision triangle pattern. The basis line of this triangle was the long-term support line that backs the bullish trend started in late 2003. It had been tested and validated in February and December 2007 (points A and B on the chart) where the price bounced back strongly.

The upside of the indecision triangle pattern was the resistance line that goes through the highs posted in May 2006, and in March and April this year. This resistance zone was set around $US 8,900.

The last retracement level (61.8%) of the sharp bullish trend occurred between last December and last March (between points B and D). This had been the opportunity for a small rebound (point H) but it failed to cross above the 38.2% level (point K).

Since the beginning of this month, both the 61.8% level and the long-term support have been broken on the downside. This means the negative trend still goes on.

The MACD has just triggered a new bearish signal, and the Momentum indicator and the RSI are also negatively oriented. In this bearish scenario the next important target is the level of the previous long-term low which is the low posted in December last year (point B), around $6,300.

When commodity prices are tanking, no one wants to know about mines, grades or new discoveries. Attention is on sliding share prices, falling prices for the commodity themselves, so rarely do investors concentrate on the underlying growth or ideas behind a company’s decision to do something. The only time heads pop up and look around when there’s some corporate activity: the chance to exit an investment because someone else has popped along with what seems to be a great offer in a falling market. That’s the greater herd theory at work: value can only be found in what the mob sees as a good idea or investment. And when times are tough and investors are scarce, interesting and intriguing news from the mining sector can slip past, almost unnoticed. In the past week or so we saw a couple of examples of this with Kagara Ltd revealing a very rich nickel strike in Western Australia, to go with mining plans for a big deposit it has outlined elsewhere in WA and Western Areas also revealing an upgrade to its Spotted Quoll prospect, which is in the same area (along the same strike zone actually) near Forrestania in Western Australia. Kagara last Wednesday had its shares suspended pending an announcement about the quality of the strike at its romantically named Lounge Lizard prospect in WA. That was done and the shares remained off the boards until Friday when it revealed that the strike was a very attractive grade of nickel (two years ago the shares would have gone mad). Kagara, which is a zinc and copper producer said it had found an intersection of “massive and semi-massive” nickel sulphides at the Lounge Lizard deposit in West Australia. “Kagara Ltd is pleased to announce a record intersection of massive and semi massive nickel sulphides in hole LFPD18W2W1 at the Lounge Lizard deposit in West Australia. The intersection is comprised of three zones of massive sulphide with an aggregate drilled width of 33.46 metres within a 76.50 metre section. “The intersection lies approximately 150 metres up dip of the previously announced indicated resource of 5.7 million tonnes at 1.08 % nickel which includes an indicated high grade resource of 263,000 tonnes at 6.42% nickel “To Kagara’s knowledge this intersection is the best in terms of contained nickel drilled, either historically or in recent times, in the Forrestania region and will result in a significant increase in the Lounge Lizard resource,” it said. But Kagara shares have been weak and are down sharply in the past week. They finished at $2.50 yesterday, down from $3.15 a week ago on Tuesday. They hit a 52 week low of $2.39 this week, breaching the previous low of $2.63. That’s a fall of around 19% in a week. The sharp fall in commodity prices has been the driver as no one wants to know anything about new metal discoveries. Copper, nickel, lead and zinc remain under pressure, and so does the Kagara share price The Kagara strike is north in the same area of Western Area’s Spotted Quoll nickel discoveries, which that company reported on earlier this month. It too has a very significant nickel discovery, but the market doesn’t want to know. Shareholders will be hoping for more at the AGM in Perth later today (Friday) The shares closed at $8.60, down 98 in the past two days. Investors are treating it like all other mining companies. No talk of a ‘boom’ here these days. Here’s part of what Western Areas said last week. “The Board of Western Areas is pleased to announce a 118% increase in the high grade mineral resource at Spotted Quoll.

 

“The revised mineral resource estimate at Spotted Quoll now comprises a total 1,045,900 tonnes at an average grade of 7.2% nickel for 75,140 tonnes contained nickel to only 300 metre vertical depth.

“The majority of the mineral resource (88%) is in the high confidence Indicated Mineral Resource category.

“This excellent result confirms the potential for a major underground mine below the proposed open pit. Western Areas is already considering early development of an underground mine which could produce ore concurrently with the latter stages of the open pit.

“In this event, production could significantly exceed the target 8,000 tpa nickel from Spotted Quoll. A mining proposal for the Spotted Quoll open pit has been lodged and, assuming this is approved by the end of 2008, ore production is expected to commence in the Sept Q 2009.

“The revised mineral resource rates Spotted Quoll as one of the world’s highest grade and most continuous nickel deposits, less than 12 months since its discovery in October 2007.

“Importantly, Spotted Quoll remains open at depth and open along strike. Further mineral resource upgrades are likely as drilling continues between 300m and 600m vertical depth.”

A map on page two of this announcement on Friday from Kagara shows the proximity of the two companies’ big strikes.

This was the second bit of good news from Kagara in recent weeks.

On August 22 it revealed more details about the deposit it was working on at Admiralty Bay with discussion about a possible mine. The shares rose after that, but that was very much different to the reaction to Friday’s announcement.

“Kagara is pleased to announce an initial resource estimate for the Admiral Bay deposit containing an Inferred resource of 72 million tonnes at a grade of 3.1% zinc, 2.9% lead, 18 grams per tonne silver and 11% barium reported at a nominal 2% zinc equivalent cutoff.

“This is a subset of a larger Inferred resource containing 97 million tonnes at a grade of 2.4% zinc (2.3 million tonnes of zinc), 2.9% lead (2.8 million tonnes of lead), 16 grams per tonne silver (48 million ounces of silver) and 16% barium also reported at a nominal 2% zinc equivalent cutoff.

“The model has been restricted to a 2.1 kilometre section of an 18 kilometre strike length of known mineralisation and the resource remains open to the east and west along strike.

“$35 million has been spent over the past 18 months at Admiral Bay and confirmed Admiral Bay as a deposit of world significance.

The company said the resource remains open to the west where the closest drill hole is located 2 kilometres along strike and which encountered a 13 metre intersection grading 4.3% zinc, 3.1% lead, 29 g/t silver and 9% barium and also encountered 25 metres grading 4.5% zinc, 0.8% lead, 23 g/t silver and 3% barium. Intersections of up to 20 metres at 8.3% zinc, 4.9% lead, 36 g/t silver and 21 barium from within the resource, have demonstrated the potential for higher grade zones within the overall resource.

“Scoping studies using the resource grades and contemplating a 10 million tonne per year underground operation have shown that the operation has the potential to produce 300,000 tonnes of zinc, 250,000 tonnes of lead and 4.5 million ounces of silver annually.

“Metallurgical test work has shown that coarse grained very high quality lead and zinc concentrates will be produced at recoveries in excess of 95% into very high quality concentrates.

“The cost of production is expected to be in the lowest quartile of cash costs worldwide.

“Metallurgical test work is continuing on the recoverability of barite to a saleable product and it is expected that a proportion of the 2 million tonnes of barite processed annually will be recovered which will further reduce the cash cost of production.

“A number of development options are currently being considered for taking the project forward.

“Drilling over the past 12 months has shown that defining a reserve from surface drilling is currently cost prohibitive and an exploration shaft with 2.5 kilometres of lateral development will be required to bring the project to a bankable status. At present, a diamond drilling program to obtain geotechnical information in preparation for the sinking of a shaft is nearing completion.”

So Admiralty Bay has a lot of potential, but there are higher costs than first thought in getting to them and getting them out.

But as attractive as they are, the market has gone right off resources and mining stocks in particular. It’s an old story for miners about the fickleness of the herd.

Yes, 2007-08 was a record year for mining and mining exports, but the sinking Australian dollar has thrown in a big spanner into prospects for 2009. That 2008 outcome indicates we remain the lucky country, despite the slump in most metal and oil prices now. If it hadn’t been for that great inflationary surge from March onwards, with gold, oil copper, plus iron ore and coal all rising, we would have seen lower export income for 2008. Total earnings from Australia’s mineral resource exports rose 11% to $116 billion in 2007-08, but it could have been a lot more, given the stronger dollar during the year. ABARE (the Australian Bureau of Agricultural and Resource Economics) said this rise reflected the combination of higher prices for energy and some mineral commodities and growth in export volumes for most commodities and these factors more than offset the effect of a 14% appreciation of the Australian dollar. But with the Australian dollar now down more than 19% in the past seven weeks, and running around the levels of August 2007, the value of 2009 exports will be much harder to work out because most commodities have experienced very sharp falls in price in recent week (and a bit longer in the case of some of the metals). Our currency fell under 80 US cents yesterday and the trade weighted index is also down, indicating we have lost ground across the board. It hit a low of 79.12 US cents in New York and ended around 79.65. In fact the 11% rise in export income for minerals came as a result of soaring prices for oil and related products, and the jump in iron ore, coking and thermal coal export receipts because of big price rises applying from April 1. Higher gold and copper prices (it hit an all time high in May, gold’s all time high was in March, Oil’s was in July). In fact it was that rise in the June quarter which completely changed the picture so far as the question of export revenues for the 2007-08 financial year is concerned. Lucky country indeed, and that surge in revenue showed up in a 13.6% rise in our terms of trade in the June quarter. ABARE figures for the March quarter show the impact of slumping prices, especially for metals. “In the March quarter 2008, the index of export prices of Australian mineral resources (export unit returns) increased marginally by 0.5 per cent compared with the December quarter 2007, as higher energy prices were almost fully off set by lower prices for metals and other minerals. “Strong oil and coal prices supported a 5 per cent increase in prices for energy minerals.  “Compared with the March quarter 2007, the index of export prices was nearly 4 per cent lower, with higher energy prices (up nearly 8 per cent) more than offset by a decline in prices for metals and other minerals (down 10 per cent). “Prices for metals and other minerals have declined over the past 12 months, largely as a result of increased supply for some commodities and weaker demand growth driven by the uncertainty surrounding the outlook for the US economy.” But in its review of 2008 this week, the Bureau showed a very different picture on pricing to that at the end of March. “In 2007-08, the index of export prices of Australian mineral resources (export unit returns) increased by 25 per cent compared with 2006-07. “Record price increases for energy minerals during the year, such as oil (53 per cent), thermal coal (19 per cent) and liquefied natural gas (LNG) (16 per cent), underpinned this rise, with the index of energy export prices increasing by 54 per cent. “Prices for metals and other minerals also increased by nearly 8 per cent as higher world prices for gold, silver, lead and copper offset price declines for zinc, nickel and aluminium. “A significant proportion of the growth in the index of export prices occurred in the June quarter with total mineral export prices increasing by 21 per cent compared with 4 per cent in the previous quarter.

 

So the 4% drop in march had changed to a 4% rise with revisions, and then risen again in the June quarter to record levels.

The growth in the June quarter reflects the increase in contract prices of metallurgical and thermal coal, and iron ore, which took effect from April, as well as higher crude oil and gold prices.”

More interestingly, our production of energy and minerals was steady in 2007-08, with higher production of metallic metals broadly offsetting lower production of energy minerals.

So if the prices that had ruled during the March quarter had continued into the final quarter of the year, we would have been looking at a noticeable fall in earnings from mineral exports.

Looking at various industries, ABARE said:

In 2007-08, there were significant increases in export earnings for: iron ore, up $4.8 billion (31 per cent) to $20 billion; crude oil and condensate, up $2.2 billion (26 per cent) to $10.5 billion; thermal coal, up $1.6 million (23 per cent) to $8.3 billion; manganese ore, up $1.1 billion (218 per cent) to $1.5 billion; metallurgical coal, up $755 million (5 per cent) to $15.8 billion; LNG, up $632 million (12 per cent) to $5.9 billion; refined gold, up $582 million (6 per cent) to $10.9 billion and uranium, up $227 million (34 per cent) to $887 million.

Apart from gold, LNG and lead, which recorded declining export volumes, higher export values for the other commodities reflect both increased volumes shipped and higher export prices.

Commodities which recorded a decline in export earnings in 2007-08 include: nickel, down $2.1 billion (33 per cent) to $4.2 billion; zinc, down $932 million (22 per cent) to $3.4 billion; aluminium, down $679 million (12 per cent) to $5 billion; and alumina, down $432 million (7 per cent) to $5.8 billion.

The decline in the export values for zinc, aluminium and alumina reflect lower prices more than offsetting higher export volumes, while the fall in the value of nickel earnings is the result of both lower export volumes and lower world prices.

Commodities for which production increased included: lead bullion (33 per cent), rutile concentrate (19 per cent), zinc ores and concentrates (14 per cent), iron ore (13 per cent) and silver ores and concentrates (12 per cent).

Lead bullion production increased in 2007-08 as recent expansions to the Mt Isa zinc-lead concentrator in Queensland and the mining of higher grade ores increased smelter output.

Rutile concentrate production was also higher as a result of increased production at Consolidated Rutile and Iluka’s Queensland Douglas operation, offsetting lower production at Iluka’s Western Australian operations.

Silver ores and concentrates production recovered in 2007-08, as annual production at BHP Billiton’s Cannington mine in Queensland returned to capacity following maintenance in 2006-07.

Zinc production was higher as a result of one-off production at Perilya’s Beltana mine in South Australia and increased production at Century, Cannington and Mt Isa mines in Queensland.

Iron ore production was also higher as BHP Billiton, Rio Tinto and Fortescue Minerals increased output from new mines in Western Australia.

Commodities which recorded a decline in production included: refined tin (100 per cent), diamonds (33 per cent), intermediate nickel (22 per cent), crude oil and condensate (10 per cent) and mined gold (9 per cent).

Production from Australia’s only refined tin project, Sons of Gwalia’s Greenbushes project in Western Australia, ceased in early 2007 when the company’s administrators closed the mine. This meant no refined tin was produced in Australia in 2007-08.

Diamond production was lower as a result of variability in mine production at Rio Tinto’s Argyle mine in Western Australia where the open pit operation is approaching the end of its life and the company continues its transition toward an underground operation.

Production at Argyle was also affected by cyclone activity in the March quarter which increased water levels at the mine, restricting access to higher grade ores.

Intermediate nickel production was lower as a result of reduced output from the Kalgoorlie nickel refinery in Western Australia. Production of crude oil and LPG declined in 2007-08 because of technical difficulties at a number of oil fields and natural field decline.

Gold production was also lower as a result of the closure of a number of gold operations with lower production also reflecting the mining of lower grade ores. Gold output was the lowest since 1989, according to ABARE.

Gold prices fell below $US750 an ounce overnight Thursday to take the fall in 2008 to 28%. very hard to see another year of solid export earnings from gold on that basis.

The issue of short-selling has come back on to the agenda in the last few days with news that Fortescue Metals [ASX:FMG] CEO Andrew Forrest has led an all-out attack on funds that he believes have been short selling Fortescue shares.

For the uninitiated, short-selling is where your broker borrows shares from an institution and gives them to you so that you can sell them on the stock market. The intention being that you believe the share price is going to fall. Once it has fallen, you buy the shares on the market and give them back to your broker who in turn gives them back to the institution.

It’s a fairly simple concept, but it is largely the domain of institutional investors rather than private investors. There are many people in the investing community who see short-selling as heresy or immoral, others argue that it all helps to improve price discovery in the market and reduce volatility.

Personally we don’t really care either way. However, there are a couple of issues that should be considered. First is the issue of transparency. The Australian Securities Exchange is forever trumpeting on about how wonderful it is and how transparent all dealings with the ASX are, yet despite this, it is unable to provide any vaguely accurate statistics to investors about how much short-selling there is in particular shares.

The crazy thing is that it would not be that difficult for the ASX to do this. Quite simply all it would have to do is remove the process of stock lending from the broking firms and instead place that responsibility with the ASX. The broker would then simply place a “Short Sell” order in their system which is then highlighted as such by the ASX. Those institutions whose business it is to lend out stock (such as NAB and ANZ) would still have a role to play, only they would be lending stock to the ASX rather than individual brokers.

It isn’t hard; it’s just whether there is the will.

Jekyll & Hyde Fund Managers
The other issue that we do find a bit puzzling with short selling is why an institution or anyone for that fact would want to lend their stock out in the first place. Most stock that is being lent out is typically held by fund managers who have invested in those shares on behalf of investors. You would think that they have a vested interest in the share price rising - you would think.

It seems bizarre then, why they would lend stock out to another institution in full knowledge that the shares are to be short-sold, potentially (although not always) having a negative impact on the share price.

Get Your Aussie Dollar While It’s Cheap
It has almost happened in the blink of an eye. As we write this morning, the Aussie dollar is trading below 82 cents. The performance of the Aussie dollar is a perfect example of how financial markets are constantly looking forward.

What happened last week, last year or today is almost irrelevant compared to the consensus market view of what is going to happen in the future. Exchange rates can be impacted by a wide range of things, but one of the most important is interest rates.

Since the Aussie traded almost at par with the US dollar back in July it has fallen by nearly 20%. What has happened to interest rates during that time? Not much as it happens, apart from the 0.25% cut by the RBA this week. The big difference now is the expectations for further interest rate cuts in Australia and possibly rising interest rates in the US which will reduce the interest rate differential between the two countries.

As with many markets, investors do have a tendency to overshoot both on the upside and the downside. Has this happened with the Aussie? We’ll get our resident technical guru Gabriel Andre to have a look at that for us on Monday.

Well here’s the good news. The Australian economy has gone for 17 years without a recession. That’s a pretty impressive growth spurt. But if the economy were a teenager, you’d wonder how much growth was left.

–The economy is not a teenager, of course. Australia’s $1 trillion economy is much more complicated than the mind of a 17-year old, probably. But for the record, growth in the second quarter was just 0.3%. Year over year, Aussie GDP grew by 2.7%, which is better than the U.S. (2.2%), the U.K. (1.4%), and Germany (1.7%).

–Former U.S. Senator Everett Dirksen allegedly once said that the main purpose of GDP is to make everything else look small by comparison. And really, who goes around and ads up the value of all the transactions in the economy in any given quarter? Aren’t these numbers a bit of a fraud? And isn’t the obsession with them based on another fraud, that the economy is finely tuned machine that can be tweaked, prodded, and manipulated by policy makers?

–In any event, the share market was not sufficiently cheered by Australia’s relative out-performance in GDP terms. Shares got shellacked. Even the decision by the Reserve Bank to cut the cash rate to 7% was not enough to kick start the market higher. And the decision actually kicked the Aussie dollar down its lowest levels in a year.

–So has anything really changed this week? It sure doesn’t look like it. Buried in the GDP data is the fact that Aussie household spending fell. What did you expect? We are starting to find out how much consumption in the economy was financed with credit cards or borrowing on other assets like cares or shares.

–In terms of personal virtue, more saving and less spending is probably good for a man. In the aggregate, it leads to lower GDP growth. But if the growth comes at the price of debt, well, perhaps we should try doing without for a few quarters. You’d get a different kind of economy over time, but it might be more productive and less indebted.

–Here in America, it’s all politics all the time. It’s enough to make a man sick to his stomach, which is how your editor has been for the last few days. It could be the jet lag. But we reckon it’s the spectacle of tens of millions of people who sincerely believe that it’s possible to live at one another’s expense. Yeesh.

–In the markets, all the action is in the currencies, which is in turn setting of reactions in oil, gold, and commodities. The U.S. dollar has started to look like the least ugly currency on the market lately. The British pound is reeling under the staggering incompetence of Gordon Brown and Alistair Darling (and Britain’s housing and debt bubbles.).

–You know what we think of the greenback over the long haul. But the dollar rally may have some legs, especially if you keep seeing increased political risks in Asian markets (Japan, Thailand, Indonesia). We had lunch with an old colleague yesterday who said it looked like shades of 1998 and the currency crisis, but with a few variations.

–What variations? Well, in 1998, the U.S. was coming off a rare (and truth be told fictitious annual budget surplus). Tax profits were pouring into Federal coffers faster than the Federal government could dole it back out. The dot.com boom was entering its irrational phase, and the dollar looked like a King.

–Today, U.S. Federal finances are not nearly so rosy. The government is going to run an annual deficit of nearly half a trillion dollars. But still, in the game of global fiat currency competitive devaluation, other countries are following what the Fed began last year.

–The stronger dollar will put a lid on oil and gold, and probably deal a few more kicks to the mining companies, and the morale of resource investors. We wouldn’t be foolhardy and average down. But you should still keep a careful list of good resource projects with excellent mineral deposits. And then try to buy them on sale.

Fletcher Building Limited (ASX:FBU) is involved with building products, concrete, steel, construction, property and housing and distribution.

The long-term chart of FBU is quite simple. From 2001 to July 2007, the stock experienced a long-term bullish trend that drove the price from $1.75 to $12. It’s a 585% gain in 6 years.

However the stock has been retracing a large part of this gain. From July 2007 and the historical high price posted at $12, it has declined by 61% to reach a recent low at $4.66 on July 16 this year.

The stock has found some support there and has already bounced back. We think there is more to come. As this stock is trendy and is obviously uncorrelated with indices, the momentum indicators suit well its technical analysis.

Those indicators are well oriented. They turned bullish in the first fortnight of July and strengthened during the past few weeks. Therefore there is a conjunction of signals that argue for a further price development on the upside.

Click to Enlarge

The MACD has already crossed above its signal line. It has also crossed above the zero line, which is a confirmation that there is a medium-term bullish trend. Why does it strengthen the existing bullish signal?

Well, traders also watch for a move above or below the zero line because this signals the position of the short-term average relative to the long-term average. When the MACD is above zero, the short-term average is above the long-term average, which signals upward momentum. The opposite is true when the MACD is below zero. Consequently the zero line often acts as an area of support and resistance for the indicator.

The Momentum indicator which is a measure of the velocity of price movement is also positive. It bottomed in July, turned upward and has been rising since, crossing above its 100-level signal line in the first fortnight of August. The trend is there, and it may remain your friend as the overbought configuration has not been reached yet (according to the RSI). It means that the trend is likely to continue before any potential significant corrective pull back.

Moving averages are used to emphasize the direction of a trend and to smooth out price and volume fluctuations, or “noise”, that can confuse interpretation. Typically, upward momentum is confirmed when a short-term average crosses above a longer-term average. Last month, the 10-day moving average (in blue) crossed above the 50-day moving average (in red). Today this 10-day moving average acts as the first support to the price action.

The current correction of the one-year bearish trend is expected to continue on medium-term perspective. The first intermediary resistance line is the 23.6% Fibonacci retracement level around $6.4 (since the stock has been bouncing back the high posted is $6.19). If the trend goes on, the most important levels to watch will be $7.4 and $8.3, which correspond to the 38.2% and 50% ratios.