What follows may sound like a criticism of Barak Obama, but it fact it has a much wider application.  In the opinion of this writer, I have seldom seen deeper and more profound divisions of opinion across the public and financial spectrums.  The only reason I mention the President is his famous promise to bring various antagonistic sectors together, a pledge which has been a dismal failure as we believe those divisions are wider now than ever. 

The reason these divisions appear important in our work regarding the worlds of precious and base metal mining is that divisions heighten controversy, controversies heighten a sense of uncertainty and uncertainty has been a vital component of historic precious metals bull markets.

It is our belief that not only are those divisions deep and appear to be irresolvable but also they bring into question some of the most deeply-held convictions possessed by political, economic and social leaders.  Among those contrasting convictions are the questions of individual liberty versus collective responsibility; free markets versus government dominated and regulated markets and, at its most basic, currencies of value backed by materials of substance versus currencies created at will and backed only by the ‘full faith and credit’ of their issuing governments.

Strangely enough, although they appears to be separate questions, there is consistency of opinion in the fact that those on the political Left normally advocate collective social responsibility, government dominated markets and fiat currencies while those on the Right generally favor individual liberty, free markets and currencies backed by genuine value.

What brought this entire series of thoughts to mind was the reality of what is happening to the Eurocurrency during the present time frame.  Even the most ardent advocate of the Eurocurrency cannot help but admit that it is failing; that it is not providing the main function of money which is to serve as a storehouse of value; and that even its role as a medium of exchange is now in jeopardy.  Several nations – particularly Greece – appear destined to return to their original currencies and no one can predict what will happen to the remaining Eurocurrency nations if first one then other began to abandon the Euro.

If the Euro fails and countries return to their ‘home’ currencies, then an entire new procedure must be worked out among already-stressed banks and that is coming to be known by the term “redenomination of risk.”  No one can be certain exactly how this is to be accomplished, if necessary.

The great question I would pose relates to the fact that no new fist currency was ever planned on what appeared to be a more solid basis.  All countries agreed to abide by stern agreements limiting the size of their deficits in relation to their Gross Domestic Product.  Gold was taken into the European Central Bank – but not in sufficient amounts to make the currency truly convertible.  Plans were put into effect to help poorer nations to attain greater levels of prosperity.

However, despite precautions such as these, here we are just a dozen years after the Euro’s creation and the currency appears to be falling apart at the seams, and there is a concomitant fear that if Europe returns to the chaotic world of numerous currencies of continually changing value, then the resultant situation could deteriorate even further.

And so we return to the question of what constitutes real monetary value.  Is it money that is created at will by mankind’s financial and political leaders or is it a naturally-evolved currency built around the concept of exchanging value – gold and/or silver – for the values represented by the goods and services purchased through the use of currency based on such values..

Our guiding policy relating to the precious metals remains this:  as long as the world persists in attempting to transact commerce via fiat currencies, the danger of ultimate default will rise and, as such risk appears to be increasing, increments of additional capital will find their way into the presumed safety of precious metals investments.

As we approach the publication of our annual forecast for 212, that guiding principle appears valid.

Several weeks ago, we mentioned the growth of another threat to American economic stability, namely the potential failure of what is loosely referred to as the “Muni” market, namely those bonds on which all interest is fully deductible for taxation purposes and which, therefore, are highly attractive to high-income investors.  Municipal bonds are issued by both states and municipalities and are a favoured means of raising capital for projects deemed to be necessary for the public well-being.

One of those projects was a new sewer system for the city of Birmingham, Alabama and more than $3 billion in municipal general revenue bonds were issued to finance the project.  We emphasize the ‘general revenue’ portion because many investors favour general revenue bonds because general tax revenues can be applied to both principal and interest payments.

Many people also assumed that those payments would continue even in the rare events of a municipal bankruptcy because taxation revenues would continue to flow while the bankruptcy was being adjudicated, but that may not be the case at all.  As we reported recently, Jefferson County, Alabama did file bankruptcy.   However, to the consternation of ‘Muni’ markets, lawyers for the County are now arguing that holders of those bonds should have to wait in line with all other creditors before they can receive further funds.

The threat to the future viability of municipal bonds in general is real and, in or opinion, is growing as many more communities and states are encountering difficulties relating to payments of their expenses and future bankruptcies are not out of the question.  Now that refusal to pay principal and interest until a municipality emerges from bankruptcy procedures could put a damper on all future municipal bonds sales, and that is a real concern.

This is just another serious problem that the financial world must resolve.

All quotes US Dollars unless otherwise indicated.

Next Melman Minute scheduled for Friday, December 2, 2011