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. Since the work has been expanded to include potential solutions to the growing list of seemingly insoluble dilemmas, the working title of the book has been revised to 'REVERSING THE WAY IN!"   February 8, 2010 Contradictions appear to be sprouting up in many directions and we believe investors and market analysts should pay particular attention to a brace of them. Perhaps one of the most startling relates to China.  On the one hand, their "Center for Forecasting Science" at the Chinese Academy of Sciences predicted the country would once again return to double-digit economic GDP growth this year.  Also, as reported by the Times of London, Chinese imports and exports are, "...expected to grow by 19 and 17% respectively." In fact, anticipated Chinese trade growth is the chief reason one of the world's great engineering projects - the expansion of the Panama Canal's large freighter capacity - is now underway and is expected to be completed by 2014.  This will enable the largest container ships, now capable of carrying twice the capacity of the biggest such vessels presently permitted to use the Canal, to pass through that waterway and provide direct access to Eastern American and Western European ports.  In fact, giant companies such as Wal-Mart and Home Depot are already expanding warehouse facilities in Houston in order to efficiently offload these much larger vessels. The contradiction lies in that fact that while such information provides strong indications of improving Chinese economic performance, virtually every single raw commodity on the face of this earth has been plunging in price of late, particularly including both precious and base metals.  According to the "DJ-UBS Commodity Indexes", which are published weekly, so far this year Petroleum, Precious Metals and Softs (such as Lumber) have all lost more than 5% YTD while Energy, Grains and Industrial Metals have all lost more than ten percent.  The chart on March Copper shows just how steep have been some of these recent commodity price declines. The obvious question is why commodities are now falling steeply in the face of improving economic data emanating from the world's largest raw materials importing nation. Another contradiction is between the vigorous statements coming out of Greece that they were going to adopt serious austerity measures to control deficits which are ruining their national economic reputation and the reality of political forces diametrically opposed to such measures.  Just after Greek Prime Minister Papandreou announced his government's planned crackdown on spending, Greek's public service unions stated they would fight such measures and immediately began preparations for a 24-hour strike later this week. A spokesman for the Greek public service union told the Times of London, "We are fighting so that the working people don't get to pay for the crisis...We demand a pay increase...a fair taxation system."  In the meantime, European Economic Union leaders vow they will not bail out Greece or Portugal or Italy or any other nation in debt over their heads, and so the potential confrontation grows. We would also ask an even more basic question, namely "Just who is going to bail those countries out, even if that was the desired course of action?"  One of the important measures of a nation's financial health is the 'National Debt to GDP' ratio.  As debt grows relative to productivity, the ability of nations to properly manage such debt diminishes and many economists agree that a Debt/GDP ratio of 90% is a dangerous level. Unfortunately, the very nations which are supposed to do the 'bailing out' are already saddled with ratios far beyond this level.  According to a CNBC table published at the beginning of February 2010, the Debt/GDP ratio levels of these nations is: Germany - 178.5% France - 236% Austria - 252.6% U.K. - 408.3 It would therefore appear that these supposed rescuing nations need to be rescued themselves!  All we can add is that the mess continues to grow, that there is no realistic solution in sight and we also believe that ultimately, the Eurocurrency will suffer the same debilitating "Quantitative Easing" solution as now infects the Pound and the US Dollar - which should accrue to the ultimate benefit of the precious metals. In the meantime, gold has hit some rough sledding itself, dropping rather quickly from the exalted level near $1230 per ounce to a recent low of about $1,040, opening the door to an important question:  "Is the recent retreat a correction within an ongoing bull market, or is it a signal that the entire golden bull of 2001-9 is being reversed?" We would point out two technical indications that the answer is the former, not the latter.  First, many past corrections within bull markets take the form of an 'a-b-c' correction and that has been gold's pattern since the December peak.  Second, in September 2009 the yellow metal broke above its previous all-time high of $1,030 and it is quite normal for a pull-back to the point of breakout to occur. In our opinion, the critical area on gold's chart is wide support from about $950 to $1,030.  Should gold fall below those levels, we would deem that to be an indication of additional weakness in gold as well as the other precious metals. As if mining did not have sufficient problem areas, the Wall Street Journal just carried a story entitled "Permit Process Drags on U.S. Mining Projects."  According to their article, "...despite having vast underground stores of raw materials, the U.S. is one of the last places miners go to start a project."  Apparently, the average wait time for all permits has now reached seven years and, if anything, the future looks even more bleak as we learn, "...This month ((Duke University Professor Emily) Bernhardt co-authored a scientific paper calling on the Environmental Protection Agency and the Army Corps of Engineers to stay all new mountaintop mining permits."  The beat goes on.  Our only positive take from such news is that it will likely restrict the supply of new metals coming to market into the future and that could bolster future spot prices. As of 9:15 AM PST, financial markets are trading within narrow limits as the Dow Industrials and Canada's TSX Index are both close to unchanged.  In precious metals, gold is holding near $1,065 while spot silver is priced at $15.00.  Both prices are above their lows of early Friday, but well under recent peaks.  Mining share indexes recovered smartly Friday afternoon, but have fallen back a little this morning while base metals are showing good gains across the board.  Interest rate futures, currency futures and spot Crude Oil are all virtually unchanged so far this AM. - - - - - All quotes US$ unless otherwise indicated. Next Melman Minute scheduled for Wednesday, February 10, 2010.     ◄  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.