A Melman Minute By: Leonard Melman   NOTE: In order to complete Mr. Melman's forthcoming book on the essential fundamentals of the developing international financial crisis and its relationship to gold and silver, new "Melman Minutes" will be posted only three times per week, each Monday, Wednesday and Friday. The working title of the book will be 'Just a Melman Minute!"   December 4, 2009   The U.S. Department of Labor dropped a bombshell on the marketplace this morning when they reported a much sharper decline in the number of job losses for the month of November than had been expected.  While such forecasting bodies as the ADP survey had been looking for job losses in the 170,000 range, the number, as reported by Labor, was only 11,000.  It is also worth noting that the Canadian job figures were equally positive.  These numbers caught the markets completely by surprise and the reactions were violent indeed.  Within the first few minutes of North American trading, we saw: * - U.S. stock markets headed higher with the Dow Industrials gaining 150 points, * - Interest rates in the USA spiking higher with the TYX gaining a quick 60 basis points, * - The Canadian Dollar soaring by over 100 basis points against the Greenback * - Precious metals began heading sharply lower. Quite surprisingly, several of these moves were short-lived and markets began to reverse themselves and, as of 9:00 AM PST, the Dow was actually net down by nearly 40 points, Canada's TSX Index has seen a 40 point advance turn into a 140 point loss and the Canadian Dollar has also given back a significant portion of its earlier sizeable gains. However, two trends have continued; namely precious metals which continue to plunge and long-term interest rates which are continuing to advance. Gold started out down about $15 per ounce within the first few minutes and, after an attempt at stabilization, have headed down since and fell to off close to fifty dollars on the day with silver down nearly seventy cents.  Our main concern is with the intermediate and long trends, since short-term fluctuations are nothing unusual, and we can see that for both gold and silver, both metals remain clearly within their major uptrends.  By our interpretation, in the case of gold, it would take a break below $1,100 to violate the intermediate term trend and a decline to below $1,000 to undermine the long-term outlook. For silver, the relevant numbers are $16.50 for the intermediate trend and close to $14.00 for the long-term. As of this moment, none of these levels appear to be in jeopardy. Perhaps the most single important aspect of the entire picture is the outlook for interest rates, both short-term and long term, since there are so many implications which revolve around those rates. For example, many nations, particularly in East Asia, have been complaining that the Fed's policy of holding American short-term rates to near zero has been negatively impacting their domestic economies and international investors are shunning US dollar investments which pay virtually zero returns.  Instead, are they have been directing their liquid funds to the Asian economies where rates are better.  However, as pointed out in a recent article by financial writer David Malpass, these low rates are, "...pushing dollars abroad and wasting precious growth capital in asset and commodity bubbles...Asia warned President Obama on his recent trip that the zero-percent fed-funds rate was flooding Asia with excess dollars, causing asset bubbles there and undercutting global growth...Europe quickly joined Asia's criticism.  On Nov. 20, German Finance Minister Wolfgang Schauble said that the U.S. policy threatened 'enormous turbulence'." It appears, nevertheless, that the Fed is turning 'deaf ears' to such pleas and has pledged to continue near-zero rates for an extended period until the U.S. economy recovers sufficiently - and it is also continuing its policy of buying up poor quality bank loans which we believes undermines the strength of the Greenback over the longer term, implying that rates will be forced higher over the long term in order to support a weaker US dollar. This morning's strong (relatively, anyway) jobs report is clearly being interpreted by many as an indication of growing American economic strength which could put upward pressure on inflation and, thereby, on interest rates as well.  Not surprisingly, long-term bond markets are falling sharply and the chart of one of our most important indicators, the TYX 30-year bond interest rate Index, has turned higher while bonds are falling. When we look at the one-year chart of these rates, a strangely familiar pattern emerges.  Following gold's peak above $1,035 in March 2008, gold fell back, but then rallied once again and formed what chartists refer to as a "head-and-shoulders bottom" formation.  When gold broke above that formation, it then embarked on its most recent strong rally.  What made this formation in gold unusual is that H&S bottoms normally occurs at the very bottom of prolonged moves, not close to the top. When we look at the TYX chart, we see a similar formation with a "left shoulder" in early July near 4.15%; a "head" at the beginning of October at near 3.9% and a "right shoulder" in late November at close to 4.2%.  The chart appears to be turning higher and we are watching closely to see if it can rise above resistance in the 4.5 to 4.6 area.  Should it break above those levels, the pattern would then be completed and, in our opinion, long-term rates would then challenge the intermediate peak at 5.1% last June. A sharp rise in long-term rates is the last thing the economy needs, as that would clearly endanger the housing and major equipment financing worlds and could truly negatively impact any potential for a robust economic turnaround. It will be most interesting to see how these various markets sort themselves out over the weekend and we will take a good, close look again on Monday morning. As of 9:40 AM, financial markets have turned quiet, with the Dow Industrials close to unchanged while Canada's TSX is down by almost 200 points, thanks to selling in the metals share markets.  Gold has recovered slightly, but is still off by about $44 at close to $1,175 while silver is down about 60 cents, trading near $18.55 per ounce.  Base metals markets are off by an average of about 1.5% while both major mining share indexes are down significantly by about 5%.  Crude oil has reversed a strong opening and is now down by about 70 cents to under $76 per barrel and the U.S. Dollar Index is ahead by 70 basis points. - - - - - All quotes US$ unless otherwise noted. Next Melman Minute scheduled for Monday, December 7, 2009 ◄  Previous Minute                                                                                                        Next Minute  ►
		DISCLAIMER The information presented above is based on data which we believe to be from reliable sources, but the accuracy of which cannot be guaranteed.  Any opinions or predictions contained herein are those of the editor and are likewise offered also for information purposes only. Any investment decisions should be made only following consultation with registered investment professionals.