Gold – and now silver as well – continue to confound doubters by moving relentlessly higher. The yellow metal is now knocking on the doorstep of $1,900 per ounce while silver is moving strongly ahead as well, now approaching $44.00 per ounce.

However, while we remain staunch advocates of the rationale behind gold being an investment of value and also the potentially desirable basis for a new currency order, it does trade within normal market structures and is therefore subject to the same kind of market action and reaction laws.

As such, we do expect a correction to set in, perhaps a serious one, over the next several weeks – but we do not believe that a full-scale reversal of the multi-year bull market in gold is likely to occur at any time in the near future.

One of the arguments for a correction in the near future is the concept of ‘cyclical activity’ and the weekly chart of gold demonstrates the ‘cyclicality’ of gold’s price movements over the past year, particularly in relation to the spacing of periodic trading highs. We observe relative highs in June 2010; November 2010 and late April 2011 – at intervals averaging about five months. Therefore, in our interpretation of the chart, we would not be surprised to see an important relative top form in September leading to a correction lasting several weeks before a renewed surge later in the year.

(We repeat our caution that no investments should be made without prior consultation with a registered investment professional.)

One of our most important rules of market evaluation is to watch what the market does rather than just listen to what political or financial leaders say. What the markets are doing about China can hardly provide encouragement to those who hold to bullish opinions regarding what is now the world’s second-largest economy. What the markets are doing is selling many of their Chinese shares in droves! As examples, please observe the charts of the following shares traded on North American exchanges.

”China Metro-Rural Holdings”, a major agricultural marketing service located in northeast China, provides an excellent example. If future economic growth for China is virtually certain, one would normally think that marketing services such as those of CNR would be a desirable investment, but the chart tells us otherwise as investors in that company have recently suffered through severe losses.

Ditto the shares of “Sino Clean Energy Inc”, which have fallen from a high of $9.67 to a current quote of under $1.75 since last November. Again, we are told that China’s economy is expanding rapidly and one of that nation’s great advances is toward expanding clean energy, so SCEI shareholders might have been expecting significant profits. Not so of late.

A third company of interest is “China New Borun Corporation”, a maker of alcoholic beverages distilled from corn stock. These beverages have a strong history of popularity in China and one would normally believe that if there was indeed a relentless advance toward greater prosperity along with improving discretionary income, such shares would be advancing, but as can be clearly seen, precisely the opposite is taking place as they have plunged from a high of over $20.00 to a current quote of near $4.00 per share.

These charts reflect what investors in these companies have been doing and they have been bailing out in huge numbers. Such market action gives us reason to question the generally accepted thesis that the Chinese economy will continue to advance rapidly and securely into the indefinite future. If it fails to do exactly that, then we must question the effect of such failures on the prices of many commodity items, particularly including the base metals such as copper, nickel, lead and zinc where during the past few years China has represented a huge and growing market.

The timeliness of this topic is suggested by comments following a recent meeting between Chinese Vice President Xi Jinping and American Vice President Joe Biden. Jinping declared that, “...There will never be a so-called hard landing for the Chinese economy” and then added word of praise for America’s “resilient economy.”

We cannot help but wonder why two such leaders would go to great lengths to reassure the public of what should normally be taken for granted if recent official declarations were honestly stated. Instead, they seem to smack of artificiality in an attempt to offset growing fears of economic uncertainty for both nations.

The entire episode reminds us of an old saying about national declarations which goes, “Nothing is confirmed until officially denied.” A skeptic would therefore conclude that if they are denying weakness in such strenuous terms, the facts would appear to point in the opposite direction – thereby perhaps explaining the recent dismal performance of many Chinese shares including those noted above.

In historic terms, perhaps the greatest influence on the price of gold is action in the United States Dollar Index. Historically, as that index has plunged, gold has risen and vice versa. Therefore, action in that index (known as DX in commodity trading or DXY in stock options trading) is an important consideration in our evaluations of price predictions for the yellow metal. As far as we at The Melman Report are concerned, that action is giving off some very bright ‘red warning flags’ which might be of some real importance.

During the past few months, as the European crisis has deepened considerably, we have heard of vast amounts of money being poured into US bond investments by troubled global investors. The amounts have been sufficient to send long term interest rates on US government debt instruments to their lowest levels in history. And yet, despite this tremendous influx of investment capital, the DX Index has utterly failed to make a significant rally, trading within a range of about 74-77 and holding near the bottom of that range this morning.

In our opinion, this chart appears to ‘want’ to break to the downside and, given that the present quote is less than three points above the historic record low, any downturn could threaten to turn into a rout for the Greenback.

This is just one more situation to keep watching.

Markets this morning show financial indexes in the USA are retreating from earlier gains and as of 9:00 AM PDT, the Dow Industrials have retreated from being up 170 points to barely unchanged. However, Canada’s TSX Index is benefitting from the precious metals’ surging prices and from early rallies in crude oil prices and remains ahead by about 75 points. Gold is trading right at the $1,890 level while silver is holding just under $44.00 per ounce. Base metals are all lower while mining share indexes remain ahead by about 3%.

In other markets, crude oil is presently close to unchanged near $82.30 per barrel; the US Dollar Index has recovered from early selling and long term interest rates are slightly higher.



All quotes US$ unless otherwise indicated.

Next Melman Minute scheduled for Wednesday, August 24, 2011.