A Melman Minute — January 2, 2008

Happy New Year !

NOTE: Because of swift and dramatic changes taking place this morning, we have updated market information to reflect conditions at 10:00 AM PST.

To say that the new trading year has opened with resoundingly positive moves for ‘hard money’ advocates and mining industry groups would be an understatement of the first order. In just four hours of trading, gold has soared to historic high levels, silver is ahead by more than 40 cents, platinum and palladium are also headed higher, grain prices are quite literally exploding upward and the February 2008 Crude Oil contract on NYMEX has just traded at one hundred dollars per barrel!

In addition, the Dow Jones Industrials, which had held near even in the first few minutes of trading, began to crater when word was received that the manufacturing segment of the U.S. economy had shrunk noticeably in December. As of 10:00 AM PST, the Industrials were down about 205 points.

All of this is having a decidedly positive effect on the mining share index with both the XAU and HUI sharply higher in early trading (see charts). In each case, the indexes have moved into new recovery high levels.

Obviously, a few minutes trading on the first day of the year hardly allows for confidence for the entire coming year, but what is noticeable is how news events continue to proceed within our general thesis. For those who are newcomers to this site, a quick review would be in order.

It is our opinion that 2008 will be a very positive year for the precious metals, for the entire petroleum complex and for rising food inflation. An important component of our outlook is that the American economy is facing a period of substantial difficulty due to the ever-spreading mortgage and credit crises, heavy pressure on the consumer to cut back their buying activities and now, rapidly rising inflationary pressures across the food spectrum. The combination of these forces could cause the American economy to fall into a severe contraction when not only the word ‘recession’ will be used commonly, but we may even hear the dreaded word ‘depression’ being bandied about.

However, given the enormous debt service requirements of the American government and the ongoing need for tremendous taxation revenues to support severely bloated governmental bureaucratic complexes, the last thing that government can tolerate is a truly deep and prolonged recession which would dry up revenues just at the same time the government’s expenditures were rising sharply, thus providing fuel for a sharp rise in the budgetary deficit, which financial markets would welcome at all.

So, our opinion is that to forestall this eventuality, U.S. monetary authorities will use every possible means of stimulating their consumer-driven economy. However, this kind of action could have two negative effects. First, an additional flood of newly-created currency would tend to strongly reduce the value of each existing American Dollar, raising the dollar cost of goods or services imported into America. Second, in classical economic language, huge increments of new currency would provide the setting for additional inflation caused by ‘too much money chasing too few goods.’ This combination would then provide the basis for rising inflationary expectations, exacerbated by the relentless and ominous rise in the price of major foodstuffs, a rise which has already driven the major grain markets higher by multiples of hundreds of percent over the past few years.

Even worse, rising inflation will likely be a force in driving interest rates higher, as investors demand greater interest returns for the added purchasing-power risk to their fixed income investments. Unfortunately, higher interest rates would greatly worsen the already-perilous condition of American real estate markets, both residential and commercial, leading to additional severe problems down the road.

Not a pretty picture, and the early market figures tend to support the proposition that 2008 could turn into a year that will be looked upon as one where truly historic developments in the economic and social life of the Western World took place.

One fact of compelling interest is worth noting. We went back into our historic records to look up the price of gold on January 21, 1980, the day when gold reached its highest level in recorded history - at least in terms of the United States Dollar. During that memorable trading day, the price of gold peaked at exactly $875 on the American COMEX commodity market. However, selling then set in and the gold commodity price closed at $837 on that day! As long time gold investors know, that was THE peak one-day market close ever for the yellow metal.

As of this moment at 10:00 AM PST, the spot price of gold is $857.50. Therefore, unless gold loses $20.50 or more in the next four hours, today’s closing price for gold will be the highest one-day US$ closing price for gold ever recorded!

That should get the public’s attention!

DISCLAIMER

The information presented above is based on data which we believe to be from reliable sources, but the accuracy of which cannot be guaranteed. Any opinions or predictions contained herein are those of the editor and are likewise offered also for information purposes only.

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