When it comes to facility with the English language, one of my favourites (by far!) was the great 19th Century lyricist Sir William S. Gilbert, the famous wordsmith whose words were set to glorious music by the equally talented Sir Arthur Sullivan.  As I watch the often contradictory flow of financial and political news of late, I am reminded of one of Gilbert's famous lines from the operetta "H.M.S. Pinafore", "...Things are seldom what they seem; skim milk masquerades as cream."

How else can we explain how what we hear one moment can be contradicted by another authoritative voice just a short while later?  Two examples from today's news wires should suffice to make the point.

In the first case, we all heard President Obama make definitive statements that he would (a) order a review all federal regulations to see which could be reduced or eliminated and (b), help commerce by slowing down the approval of new laws.  How then do we explain the fact that his Energy Secretary Stephen Chu just announced a plan to introduce the creation of a federal clean energy standard which, in our opinion, would undoubtedly be accompanied by new laws and regulations enforced by a newly-created bureaucracy?

In the next case, the President (and we are not attempting to deliberately pick on him, it's just that he occupies the most important position on earth) spent a great deal of time to tell us that America was not mired in an economic slowdown but was in fact, emerging into a period of sustained growth.  Strange then, isn't it, that his own Commerce Department just issued a report that GDP growth in the Fourth Quarter 2011 came in at a less-than-expected 2.8% and growth for the entire year of 2011 was a sluggish 1.7%.  In the same vein, why would the Federal Reserve just announce that they intend to hold short-term interest rates to near-zero right through 2014 if conditions were rosy and improving?

It is not difficult to relate these pieces of information to our overall perspective regarding the precious metals.  In one case, conflicting, complex and overwhelming levels of bureaucratic regulations impede the flow of commerce and industry, reducing profits and thereby reducing the inflow of revenues into the Treasury, thereby requiring the imposition of additional increments of taxation on an already-overburdened economy.  In the other case, sluggish economic growth - and this 'recovery' from the 2008-09 "Great Recession" is already far below historic standards - will likely bring about even greater increments of stimulation including, we believe, the continuing or even accelerating creation of artificial, fiat, unbacked currencies.

Historically, unlimited fiat money creation has lead to accelerating inflation over time and accelerating inflation has been one of the important historic factors in previous precious metals bull markets.

America is not the only country on earth suffering through difficult economic straits and word out of Spain only emphasizes the point.  As reported in a Reuter's article, reports from that troubled country now show an astonishing five million people out of work while their official Unemployment Rate in the Fourth Quarter 2011 has soared to a colossal 22.8%, up from the preceding quarter's 21.5%.

Incredibly, Spain's leaders still pledge themselves to a reduction in Spain's budgetary deficit in the coming year.  One can only wonder how, with industry still shrinking and the numbers on unemployment and social welfare rolls increasing, Spain will be able to reduce their deficit, rather than see it soar to even higher levels.

The same article points out that scepticism is rising that Portugal will be able to make good on its deficit reduction pledges and speculation that its worsening economy will lead to a potential request for a second Eurozone bailout is on the rise.  Perhaps, like Greece, it will face an eventual write-down of the nominal value of its government debt as well.

Speaking of Greece, for the umpteenth time world leaders are once again discussing that nation's troubled government debt, particularly in light of continually diminishing levels of economic activity, rising unemployment and still staggering levels of government deficits.  Those problems are being reviewed both at this week's Davos, Switzerland high-level economic summit and at the planned European economic summit next week.

That, as we see things, is the heart of the problem.  The world's leaders meet to discuss some particularly severe problem, they issue a statement at the end of their meeting delineating exactly how they are going to resolve the problem, and then nothing happens as the problem persists into the future, causing yet another round of meetings and another round of 'solution' announcements.

Kind of reminiscent of the Bill Murray classic, "Groundhog Day" where one day repeats itself over and over again.

From our point of view, the growing frustration with seeming inaction was well illustrated by the headline attached to an AP story this morning, "Greek debt relief talks grind on" (Our emphasis).  In the meantime, the passage of time is allowing the problems to grow, Greece's potential (probable?) default looms ever-closer and British bookies are even taking odds-on bets that Greece will exit the Eurozone sometime this year.  We at TMR tend to believe that if Greece goes, Portugal, Italy and Spain may not be too far behind, raising the potential for a true monetary catastrophe in Europe, one whose effects could easily spill over into the remainder of the international financial community. 

We have written about the fact that many laws created to solve one problem often lead to others of an unanticipated nature.  Such actions are referred to as the law of "unintended consequences."  We have just learned of another such development this morning.

For the past two decades, America's judicial system decided to 'get tough' with criminals, particularly those in the process of becoming 'career criminals'.  Long sentences were handed out to such persons with the goal, of course, to protect overall society.  However, one of those 'unintended effects' is now coming home to roost.  The fastest growing population group in America's prisons is now those 55 and older.

Aside from the normal prison expenses, aging convicts, like the rest of society, require substantially more expensive medical treatments than the general population and this is putting serious strains on state and municipal budgets as the number of prisoners age 55 and over has quadrupled during the past 16 years to over 124,000, according to a study by the "Human Rights Watch."

In a Wall Street Journal article on the subject, Jamie Fellner, author of the study, noted, "...walk through any prison and you'll see a surprising number of wheelchairs and walkers and portable oxygen tanks."

Another expert, Robert Greifinger, retired officer of the New York City Department of Corrections added, "Heart problems, diabetes, cognitive impairment and end-stage liver disease from hepatitis or cirrhosis are becoming increasingly common problems in our nation's prisons..."

Someone has to pay for such treatments and budgets are already strapped, putting more upward pressure on government debt and deficits - and the overwhelming surge of problems related to the future aging of America thanks to the Baby Boomers entering retirement age is just beginning to be felt.

For these reasons and others, we do not see an early solution to the budgetary problems of many nations and, therefore, we see a continuing future of high deficits, rising debt and political uncertainty - all historic breeding grounds for past precious metals bull markets.

As of 9:45 AM PST, financial markets in Canada and the USA are diverging with the Dow Industrials off by about 80 points while the TSX Index remains close to unchanged.  Precious metals are higher with gold now trading near $1,735, a clear short-term chart breakout, while silver is up by about forty cents and is now approaching the $34 per ounce level.  Base metals are lower on balance - perhaps due to America's unexciting GDP report - while mining share indexes are posting gains of about two percent so far today.

In other markets, Crude Oil is hovering close to the $100 per barrel mark; the US Dollar Index is falling once again; and long term interest rates are slightly higher.

All quotes US$ unless otherwise indicated.

Next "Melman Minute" scheduled for Monday, January 30, 2012