Anyone who knows me personally is aware that I have a definite aversion to using profanity, but this morning I find only one description of various ongoing information releases to be of worth: “Boy, is the $&%^ hitting the fan today!”

First, gold exploded upward, soaring to a new record high only a couple of days after suffering a steep decline. Gold is now above $1820 for the first time ever, attaining a new record of $1,827, and silver is also rallying strongly. On the other hand, financial markets have been crashing since last night, many of them giving back virtually their entire recovery rallies of the past few trading days. The Dow opened down 300, then quickly fell to minus 500 before recovering a portion of those losses. But that was hardly all as currency markets were in upheaval, American bond yields were collapsing and one commodity market after another – specifically including the base metals and petroleum complex – came under heavy selling.

A combination of events has combined during the past few days to bring into question the entire concept of a lasting and solid economic recovery from the 2007-9 debacles and some of the most negative information was released during the past few days. Here are some recent items:

• The Philadelphia Fed just released a report showing that economic activity in the mid-Atlantic region fell to its lowest level since March 2009, suffering the biggest one month decline since October 2008 which took place during the heart of the “Great Recession.”

• As if that information was not sufficiently negative to discourage economic observers, the New York Federal Reserve’s Empire State Index declined sharply in early August, the third straight decline in that index. The New York Fed also reported that their outlook for future activity in New York State fell to its lowest level since February 2009.

• The number of people applying for unemployment benefits in America suddenly rose sharply last week, increasing to 408,000 from 399,000 the prior week, dashing hopes (at least for the time being) of major improvement on the jobs front.

• On the real estate front, the number for existing home sales dropped during July for the third such monthly loss in the past four months, providing yet another damper for those expecting rapid and sustainable economic recovery.

• According to a Postmedia article, Canadian economists now expect a dismal performance by Canada’s manufacturing segment in June will push the country into an overall contraction. Statistics Canada had just reported the third consecutive decline in manufacturing activity that month.

• Germany’s rate of economic growth has ground to a virtual halt as Second Quarter 2011 GDP growth came in at a meager +0.1%, scuttling hopes that the German economic engine will be sufficient to rescue other, less vibrant European economic nations. France added to the uncertainty by reporting no growth at all during their Second Quarter 2011.

To top things off, Greece’s economy remains locked in deep recession and forecasters are now looking for a further 2% decline in economic activity in the coming year. Many of the so-called ‘rescue programs’ which have enabled that nation to survive have been based on Greece repaying its debt through robust economic growth. Now it appears that not only will there be no growth, there will be further contractions, meaning diminishing revenues combined with additional expenditures – hardly the recipe for handling their monstrous levels of debt.

In fact, the entire European economic equation is now up in the air. Analysts had been counting on Germany and France to provide the funds to bail out many other troubled countries, but it now appears the expected expansion of those economies will no longer occur, leaving gaping holes in European rescue expectations.

Even the editorially left-leaning New York Times dared to publish a story relating to the “Elephant in the room” no one wants to talk about; that of a growing possibility that a major economic contraction, perhaps even leading to a SECOND GREAT DEPRESSION, is presently taking shape. The article, authored by Simon Johnson, former Chief Economist at the International Monetary Fund (IMF) notes the high levels of unemployment which remain following the previous economic decline when history suggests they should have retreated much more rapidly combined with the likely propensity of government to cut back expenditures just when the economy was apparently entering a period of contraction – a policy which we hold has some merit, but many economists believe is suicidal.

There are many facets to this economic puzzle and we anticipate the situation may clarify itself somewhat over the next several days and weeks. In the meantime, levels of confusion and uncertainty are on the rise, and we attribute much of gold’s sudden and dramatic gains to that set of circumstances.

We have to get a chuckle out of the wretched short-term timing of some forecasters relating to the price of gold. Two in particular were just published.

In the first case, UBS (formerly Union Bank of Switzerland) was quoted by Bloomberg News Service yesterday predicting that gold “may fall by $100 an ounce or more in the near term.” The ink was hardly dry on that prediction when gold rose by about $50 in the next two or three trading sessions.

In the second case, major US banking establishment, Wells Fargo, predicted following the markets of August 15 that gold\s price was “...in a bubble that is poised to burst” and they felt compelled to, “...ring the warning bells...There could be substantial risk to gold.” Gold closed on Monday at $1,756 and is now trading near $1,822 - $56 HIGHER.

Obviously, the price of Gold could go into decline as there is no implied guarantee of further rallies, but as frequent contrarians, we do find such predictions to be of considerable value by pointing out there are still many serious analysts who are ready to go short gold and thereby provide further ‘ammunition’ for the next golden rally when they scramble to cover those short positions.

As of 10:15 AM, financial markets continue to show substantial losses with the Dow Industrials off by about 440 points while Canada’s TSX Index has declined by 259. Gold is trading at $1,823 and silver is just below the $40.70 level. Base metals have reflected the growing concern regarding an economic slowdown and all major members of the group including copper, nickel, aluminum, lead and zinc are sharply lower while mining share indexes are down by about one percent.

In other markets, the petroleum complex is down dramatically with crude plunging by nearly $5 per barrel; the US Dollar is showing some relative strength and long term interest rates continue their fall to historic low levels.

One last note: we find action in the Dow Industrials has now been contained within a narrowing triangle drawn between a downtrend line connecting the highs of late July with yesterday’s peak and a slightly rising trendline drawn between the lows of last week and this morning’s opening lows. The direction which the average breaks out of this triangle could provide us with a valuable clue regarding future market direction.



All quotes US$ otherwise indicated.

Next Melman Minute scheduled for tomorrow, August 19