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Melman Minutes - By Leonard Melman
MELMAN MINUTE April 9, 2012


A new political firestorm appears to be brewing in America, just in time for the all-important November 2012 Presidential elections.  We are referring to the rapid growth in America's gross national debt which threatens to exceed the legal limit just prior to the elections.  This could force an unwelcome bitter debate which would take place before the voters trooped to the polls.


The arithmetic is simple.  According to figures released this past Friday, the official US National Debt has just reached $15.617 trillion, an increase over the past 12 months of $1.358 trillion or just over $113 billion per month.  The present legal limit on the debt is $16.394 trillion or $777 billion over the present figure and at the present rate of increase, the legal limit would be reached in late October.


While few are talking about this situation at present, we believe it is a problem which could have a critical impact on the election.  It is unlikely President Obama will be able to simply pass over the fact that the debt is still escalating virtually out of control four full years into his administration, but, at the same time, Senators and Representatives of both parties will be forced to admit that their efforts to bring the soaring debt under control while maintaining prosperity have been an abject failure.


One can only imagine the buck-passing and blame games which we believe will likely proliferate.  From the precious metals point of view, in our opinion this reality will raise the level of political uncertainty and, historically, uncertainty has been a concomitant of past precious metals bull markets.


Throughout the years, various indicators have had a primary affect on the price of gold.  For many years, the published rate of inflation was of vital importance and precious metals traders awaited the monthly inflation figures with bated breath.  At many other times, the US Dollar Index has played a most important role will gold and silver rising and falling in reverse to movements in the Dollar Index; rising when the index fell and vice versa.  During the period 1978-80, gold and silver marched in virtually reverse lockstep to movements in the Dow Industrials and the S&P 500 averages.


During recent months, another indicator has suddenly taken center stage.  We are referring to the anticipated likelihood of a resumption of Federal Reserve Board money creation orgies known as "Quantitative Easing." (QE)  When it appears the likelihood of such intervention is growing, gold and silver seem likely to rally.  When indications appear that make such stimulative actions less likely, gold and silver frequently fall, sometimes quite dramatically such as the $92 drop in one day last month following a Bernanke statement which appeared to indicate that no further QE programs would take place in the foreseeable future.


Perhaps the most solid indicator we have regarding the likelihood of such programs is the presumed most likely direction of economic development.  When the direction appears on the side of solid growth, then the need for any further stimulation would seem to diminish.  When the presumed most likely direction of economic growth is negative, then the outlook for stimulation in the form of Quantitative Easing should be enhanced.


Therefore, we find it to be of some importance to review a series of economic indicators on a regular basis and what we observed over the weekend was a bit of an eye-opener by raising serious questions regarding the overall strength of the economy, one which the general public believes is growing stronger on a steady basis.


If that is so, how then can the following data showing economic weakness which we compiled this past weekend be explained?


During January:

  • Wholesale Sales declined

  • Trade Balance Deficit increased

  • Home Price Index declined

During February:

  • Capacity Utilization declined

  • Durable Goods Consumption declined

  • Business Contracts declined (sharply)

  • Construction Spending declined

  • New Housing Starts declined

  • Public Spending declined

During March:

  • New Home Sales declined

  • Consumer Confidence Index declined


There were obviously some areas of economic strength, but the above collection of information seems at odds with the perception that economic growth is underway and is accelerating - which is precisely the impression the current Administration is attempting to foster and which is, we believe, responsible for the perception that there is no need for the Fed to engage in further stimulative activities, most particularly those involving new money creation on a wholesale basis.


There is yet another indicator which is telling us that all is not well and that is the banking industry.  One of the major US banks, and perhaps the best known of all, is Bank of America (ticker symbol: BAC), a bastion of banking since it was founded in San Francisco more than a century ago.



As can be noted on the five year chart of BAC, their stock fell rapidly - along with virtually every other bank, during the financial crisis of 2007-09 - from a high of over $52 to a low near $3 for a wipeout of more than 94% of BAC's value, but it is what has happened since that we find to be most interesting.


After recovering rapidly during 2009 to nearly $20, BAC suddenly lost its upward momentum, turned sideways for a while and then began to decline in a remorseless manner, falling all the way back down to $5 by late 2011.  It has since rallied back to $10 before declining during the last few sessions to a present quote just under $9.00.


In our opinion, the fact that BAC remains more than 84% below its peak levels after three years of recovery seems an indication that the 'recovery' has hardly been robust, that it is now at risk and, combined with the weak economic data noted above, could easily be an indication that new economic difficulties may indeed show up in the months ahead; weaknesses that may require a distinct revision in the tone of the Fed's public statements - to the possible benefit of precious metals investors.


That apparently is the case in early trading this morning as gold rallied in early trading by almost $20 while industrial metals such as silver and copper are close to unchanged or sharply lower.  As of 8:30 AM PDT gold has encountered some selling but remains ahead by about $12 to near $1,642 while silver is trading down by 35 cents to just above $31.30 per ounce.  Base metals are trading lower with copper down about 8 cents to just above $3.70 per pound and mining share indexes are slightly higher. 


In other markets, the US$ is trading close to unchanged in currency markets; Crude Oil is down by a sharp $2.31 to $101.00; and long term US interest rates are slightly lower.




All quotes US$ unless otherwise indicated.


Next Melman Minute scheduled for Monday, April 30, 2012



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