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Once again the expression “déjà vu” comes to the forefront in our analysis of this morning’s events, repeating a pattern we have witnessed over and over again in recent years.  That pattern informs us that when news from Europe and/or Asia is predominantly negative, investors return to US Dollar-denominated instruments, thereby creating the following pressures:

• US Dollar higher

• Foreign currencies, specifically including the C$ lower

• Gold, silver and other metals lower

• Crude Oil lower

• US bonds higher

• US long term interest rates lower,

All of those have taken place in early trading this morning as can be illustrated by the short-term charts of crude oil and gold which follow below.

First crude oil -

Next gold –

After a couple of hours of trading all the indicators were following their normal patterns with the Dow off by about 70 points, US$ up about 20 basis points, the C$ down by a similar amount etc.

Every so often we encounter a paradox which is so bizarre that it might be termed amusing if the consequences were not so potentially serious.  An analytical article in this morning’s Wall Street Journal entitled “Ticking Financial Time Bomb” presents us with such a situation.

The article details the potential for a financial crisis in America following after December 31, 2012.  Among the provisions of laws already on the books they find an end to the payroll tax holiday; an increase in income tax rates; spending cuts will be triggered; and the national debt will be bumping up against the present limit, thereby forcing a new and public debate which might tend to diminish public confidence in the economy.

Fed Chairman Ben Bernanke was quoted as saying that if these events took place then, “This is a massive fiscal cliff.”

What strikes us as so odd is that these measures which Bernanke terms so awful are virtually identical to the measures now being forced upon one European nation after another under the pretext that such measures will solve economic problems!

In fact, the measures now being passed in Europe are even more Draconian in nature in terms of austerity.  Those countries are cutting back entire areas of social services; firing huge numbers of civil servants; and reducing pensions while at the same time raising taxes in every conceivable direction.

My personal opinion is that the world’s financial leaders do not have either a comprehensive or credible ‘game plan’ for solving fiscal problems, turning at one time to overtly Keynesian tactics such as running government deficits in order to stimulate economic activity while at other times recommending countries reduce or eliminate many government activities.

Here in Canada we can see the latter principle at work as the federal budget scheduled to be released later today is predicted to include billions in spending cuts, reductions in the number of civil servants, raise serious questions about government pension policies, etc.  At the same time, the Province of Ontario, which has been Canada’s representative to the “lets borrow until it is coming out of our ears” club, has suddenly received a budget from their Finance Minister that includes many measures similar to the expectations of the federal budget.

The great question we must answer when it comes to the precious and base metals is exactly how these varying policies will interact with each other and whether there is a real hope for a long-term positive outcome of prosperity and stability.

Our own belief is that both policies are headed in the wrong direction because their aim is off.  In one case they are saying that government should tweak a series of laws to bring about an outcome resembling the one desired by advocates of austerity measures.  In the other case, they are saying that government should tweak its laws in a manner likely to bring about an outcome favourable to the Keynesian crowd.

Our own belief is that the problem stems from the enormous body of laws already on the books which collectively present an immense impediment to the efficient operation of our economic societies.  If that is the case – and we strongly believe it is so – then the right answer would be the steady and relentless elimination of those laws on the books which act as a restraint against economic efficiency.

Unfortunately, it appears that no government at all seems likely to turn to the solution of abolishing laws which act as such impediments.  Therefore, we continue to believe that the presently-offered ‘solutions’ constitute nothing but appeals to the public aimed to garner approval but do not represent the kind of solutions which have the potential to produce the desired outcomes.

An illustration of the difficulties has just been heard from Spain with its 23% unemployment and collapsing real estate markets.  Despite those realities, their government has just enacted a series of austerity measures and the country’s two major unions just responded by calling for a general strike in Madrid.

And on and on it goes……..

As of 9:00 AM PDT, gold and silver continue to trade lower with gold down by about $9 to $1,648 while silver is off 22 cents to about $31.8.  Base metals are down moderately on average and mining share indexes, not surprisingly, are down by a sharp 1.5 to 2%.  Financial markets continue to trade lower as well with the Dow Industrials down by nearly 80 points while Canada’s TSX Index is off by 180 in reaction to lower resource prices.

In other markets, Crude Oil is down about two dollars to near $103.50 per barrel; the US$ Index is ahead by 15 basis points to just under 79.50; and long term interest rates are moderately lower.

All quotes US$ unless otherwise indicated.

Next Melman Minute scheduled for Friday, March 30