“GOLD SMASHES TO NEW RECORD ABOVE $1,875

Exceeds “The Melman Report” forecast high for 2011 of $1,850.”

Just a few months ago, virtually no one would have predicted the power of gold’s monumental move of the past several weeks.  It has caught virtually everyone by surprise, including ourselves.  Many “gold bulls” fully expected further gains for the yellow metal in the last half of the year, but it is the speed with which those gains have been attained that is the startling feature.

After reviewing the situation as it is playing out, our interpretation reverts back to the original reasons for believing in gold’s future.  We believe the number of people who have reached the conclusion that, as presently constituted, government and economic leaders are unable to solve the world’s present economic difficulties is growing rapidly, perhaps far more rapidly than previously envisioned, – and many of those people are turning to gold – at virtually any price – in their search for personal financial safety.

As we can observe in the short-term gold chart, the succeeding highs for the past five trading days have been:

$1,745

$1,769

$1,798

$1,845

$1,878 (so far today)

To describe such  action as an amazing performance would be an understatement – and yet, in our opinion, given the underlying deterioration in the world’s financial structure, this almost panicky move into gold is truly understandable.

We may be somewhat radical in our approach, but at the Melman Report, we believe the present performance in gold – and the potential for much more enormous rallies into the future – stems from what we regard as a primary monetary delusion that has been increasingly adopted by the world’s leading economic power for eight decades.  We are referring to the delusion that non-value is the equivalent of real value.  Non-value is the term we assign to unbacked, fiat currencies which are created in staggering abundance through the operation of printing presses or via electronic entries.  In either case, the currencies in question are being created by various central banks in vast quantities without any equivalent creation of genuine wealth.

To expect economic stability and true prosperity from such an arrangement is, in our viewpoint, a true delusion and history tells us that when you are amiss in your calculations of reality, you only lose to the extent of your miscalculations, but when a delusion is in error, there is a complete decimation of values built upon such a delusion.

We also wish to repeat something else:  the present economic structures which are based on fiat currencies have taken eight decades or longer to establish.  They are interwoven into virtually every facet of national and international life and, in many cases, their impositions have destroyed previous free market mechanisms which no longer exist and, therefore, are not available to take the place of the presently failing mechanisms.

Therefore, the ‘conventional’ monetary and political leadership appears to be floundering, vacillating back and forth from empty gesture to unworkable plans, and the public is growing increasingly aware of the seriousness of the situation.

A classic example of this principle is watching the European monetary authorities flounder in the face of their present troubles.  One day Germany and France are to somehow pick up the slack and the next day it becomes apparent that their own economies are in difficulty as their stock markets descend rapidly.  One day we hear of a new issue of European bonds and the next day that plan is put on the ‘back burner’.  One day there is talk of breaking up the European Union and reverting to the previous situation where numerous individual national currencies prevailed and the next minute there is talk of strengthening the union.  And so it goes, as one European nation after another heads toward economic oblivion.

Even in America, the situation is equally uncertain.  One party wants to increase taxes while the other says to reduce them.  One party wants to scrap nationalized medical care while the other party wants to increase it.   One party says to cut back the size of government spending while the other party wants to increase it.  One cadre of economic experts, perhaps led by Nobel Prize winner Paul Krugman, wants to open the floodgates of economic stimulation via additional deficits and money creation while the other side wants to reduce them – while the world watches with growing concern and securities markets once again head south, breaking below many major trendlines which have held since March 2009.  Of particular concern are markets in Germany, France and England which have come under severe selling of late.  The chart of the British FTSE Index is an excellent example.

Somehow the overall situation can be condensed into a conversation I took part in during my visit to Sudbury earlier this week to tour Pacific Northwest Capital’s River Valley project.  One of the participants was active in politics but held to positions which were considerably to the political “left” than our own.  It also happened that he was an advocate of Barak Obama’s presidency.

When I asked him what feature attracted him the most, he declared that it was the President’s new-found focus on bringing both sides “together” in order to discuss the problems in a spirit of cooperation.  I ventured to suggest that such gathering together would have little value unless there were some real and workable plans being put on the table and I personally found virtually nothing of the sort emanating from the White House. 

We agreed to the gentlemanly suggestion of “agreeing to disagree”, but it struck me that this was an example of a willingness to accept a political slogan such as “working together” in place of real, concrete, hard debate in order to come to grips with the underlying difficulties of the current situation.

The world is truly in a state of flux and it will be most interesting to observe what takes between the present time and Monday morning – but we believe that gold is telling us that some truly difficult periods may lie close ahead.

As of 8:50 AM PDT, financial markets are truly in a state of flux with both the Dow Industrials and the TSX Index gaining ground following sharply lower openings, then once again retreating to lower levels.  The Dow Industrials have been down 120, up 95 and are presently about 40 points lower.  The comparable figures for the TSX Inde3x are minus 125, plus 75 and minus 50 respectively.  Gold is holding on to most of its gains and presently trades near $1,853 while silver has been showing good recent gains and has risen to the $42 per ounce level.  Base metals are up slightly on balance and mining share indexes have posted gains of about two percent.

In other markets, long term interest rates are little changed; crude oil has recovered to near $83 per barrel and the US Dollar Index has retreated back below the 74 level.

All quotes US$ unless otherwise indicated.

Next “Melman Minute” scheduled for Monday, August 22.