I realize what follows in this morning's "Melman Minute" may forever bar me from potential membership in the "Barak Obama Fan Club", but I will willingly take that risk.  However, following last night's State of the Union Address" (which was anything but a speech consistent with historic State of the Union Addresses), I feel compelled to comment on the implications of his speech to our world of precious and base metals mining.

Central to this analysis is the concept of "capitalism", which many regard as a word worthy of having their mouths washed out with soap if uttered by innocent children.  However, I am obtuse enough to believe that free, unfettered, genuine, capitalism offers the only economic pathway to real and sustainable prosperity - and, strangely enough, quite probably to lower precious metals prices.

By the most welcome coincidence, this morning's media was filled with articles which clearly demonstrate the logical and immediate advantages of capitalism in managing the world's economic affairs.  One look at the chart of Natural Gas over the past year will point us in the right direction.

After holding steady in the area of $5.00 per Natural Gas contract (One million British Thermal Units), the price of NG began to slide relentlessly in mid-summer 2011, declining through $4.50, $4.00, $3.50, $3.00, $2.50 - and eventually plunging to a low just a few days ago of barely $2.20 per contract which was the lowest price in more than one decade.

The progression of news followed a very logical pattern.  As one new natural gas discovery after another was reported, particularly including the giant new fields in western North Dakota, analysts began to calculate the effects of such increments of new supply and decided the odds were growing that there would be massive over-supply if these fields ever came to market, and, given the simple economic rule that over-supply depresses prices, the chart of NG began to accelerate downward.

However, as the price approached its recent bottom area, many producers were forced to accept the reality that at such prices, their new projects as well as some existing producing fields would likely be unprofitable and began to announce delays or elimination of such projects.  As those announcements were made, analysts were able to re-calculate their supply-demand expectations which were now becoming more favourable, and the price began to rise, surging from $2.20 to $2.70 - a gain of more than twenty percent - in just two weeks.

The essential point is that none of this required the assistance - or interference - of any government agency or bureaucrat.  Simply using common sense and reliable price data, capitalists were able to respond quickly to changing circumstances.  There are several other recent examples of the principle.

Reacting to a massive growth in trans-oceanic shipping related to international commerce, a multitude of new giant-sized vessels were commissioned during the years 2007-08.  Unfortunately, many of them took 2-3 years to build and by the time they entered service - thereby increasing the supply of shipping capacity - the world's economies were either stagnating or contracting, reducing demand.  As a result, in a perfectly predictable manner, the rates shippers were able to charge went into decline and the "Baltic Dry Index", which measures such rates, has now fallen dramatically to the area of the lowest prices attained at any time during the past decade..

By the way, I would suggest that the natural market forces will correct the problem, but not without pain.  Those companies that cannot afford to take on business at current rates will begin to reduce their bookings, the order books for new vessels will shrink and economic forces will advance which will bring demand back in line with supply over time - and it will be done through logic and reason, not government fiat.

In our world of mining, even after recent corrections, the fact is gold at $1,600 and silver above $30 offer tremendous opportunities for the discovery and establishment of profitable mining enterprises.  Not surprisingly, therefore, rational miners have increased their prospecting expenditures during the past year in British Columbia by 35% compared to 2010.

Examples where free capitalist markets produce rational results abound in many directions - but still multitudes blind themselves to the benefits of capitalism.  They would prefer government regulations which restrict discovery and production and which intrude deeply into the decision-making process, adding increments of additional expense and inefficiencies in their wake.

And so, I listened intently to the President's SOTU speech and, after examining a transcript this morning, I can cite the following quotes which suggest his general preferences, in my opinion, remain in the direction of having government provide the basis for prosperity and expansion and not reliance on free markets and private decision-making.

"I intend to fight obstruction with action."

"Tonight I'm announcing the creation of a Trade Enforcement Unit that will be charged with investigating unfair trade practices..."

"There will be more inspectors to prevent counterfeit or unsafe goods from crossing our borders."

"Join me in a national commitment to train two million Americans with skills which will lead directly to a job."

"...So tonight I call on every state to require that all students stay in High School until they graduate or turn eighteen."

"The opponents of action are out of excuses.  We should be working on comprehensive immigration reform right now."

"This country needs an all-out, all-of-the-above strategy that develops every available source of American energy..."

"I'm requiring all companies that drill for gas on public lands to disclose the chemicals they use."

"I'm directing my Administration to allow the development of clean energy on enough public lands to power three million homes..."

"We will also establish a 'Financial Crimes unit' of highly trained investigators..."

"And tonight, I'm asking my Attorney General to create a special unit of federal prosecutors...to expand our investigations into abusive lending and packaging of risky mortgages that led to our housing crisis."

"Send me a bill that bans insider trading by Members of Congress."

"With or without this Congress, I will keep taking actions that help the economy grow."

And so it went; one proposed government plan after another accompanied by thinly veiled threats of punitive action of one sort or another. 

To bring this all together, it is our belief at the Melman Report that free enterprise allows for the most efficient and profitable form economic activity as well as a genuine diminishment of government costs, with the combination resulting in less government expense, more government revenue in the form of taxes on both profits and income (although I personally dislike that concept) and, as a result, a genuine hope for budgetary surpluses accompanied by reduction of debt over time, thereby leading to sustainable prosperity. 

Should that occur, it could actually lead to reduced crises, reduced artificial monetary creation and thereby less upward pressure on the price of the precious metals, but a better environment for the base metals as genuine prosperity finally could take place.

However, after watching the President's SOTU Address, Our opinion at TMR is that there will be no substantive change in the emphasis of governments in general and, therefore, a continuation of the type of crises that have been of such concern to multitudes.  As such, we continue our position that precious metals holdings remain a valid form of insurance against future monetary crises.

As of 9:15 AM PST, financial markets are neither enthusiastic nor panicky after the Obama speech with the Dow Jones Industrial Average down by a modest 60 points while Canada's TSX Index is off by about 20.  Gold and silver are up compared to their lowest levels, but remain down on the session with gold off by about $7 and silver down by close to 15 cents.  Base metals are ahead by an average of about one percent today and mining share indexes are close to unchanged.

In other markets, Crude Oil has traded lower to about $98.50 per barrel; long term interest rates are little changed; and the US Dollar Index is ahead by about 20 points to back above the 80 level.

All quotes US$ unless otherwise noted.

Next "Melman Minute" scheduled for Friday, January 27