A Melman Minute — January 3, 2008

EXTRA! EXTRA! - In just thirty minutes between 8:30 and 9:00 AM PST, the price of gold shot up by almost ten dollars, reaching $869 spot! Crude Oil has once again touched the US$100 per barrel mark !

Markets have settled down considerably in early trading today following yesterday’s fireworks. Both gold and Crude Oil - which had generated the most dramatic headlines - are relatively quiet this AM with gold holding near (all figures US$) $860 spot and Crude Oil trading near $99.50. American securities markets, which had fallen sharply on the first trading day of the new year, are moderately higher with the Dow up about 60 points two hours into today’s session.

Currency trading has also been muted with most major currencies relatively unchanged so far this morning, including the Canadian dollar which is holding at just under US$1.01. We consider the Canadian Dollar to be of great importance as a reflective measure of activity in the natural resource field, since Canada is home to fabulous metal, fuel, agricultural and timber reserves. As can be clearly seen from the long-term chart on the C$, although there have been periodic selling waves, the major trend since 2003 has been clearly toward a stronger Loonie.

In our opinions, there is another, and perhaps more vital consideration relating to economic theory that is propelling the Canadian currency to higher levels versus its American counterpart, and that is the generally much sounder actions by Canadian political and monetary authorities.

For more than a decade, the Canadian government has been showing deep concern about the size of the per capita national debt and what had been a frightening level of budgetary deficits. In every single year from 1978 through 1996, the Federal Government deficit in Ottawa had exceeded ten billion dollars and by the mid-1990s, the figure was in excess of forty billions per year - in a nation of barely 30 million people.

However, since 1997, there has been a dramatic change. In that year, the deficit fell to just C$8.9 billion and the following year, a string of budget surpluses began, a string that is intact - and growing - to the present time when the surplus for the current fiscal year is estimated to be in excess of twenty billion dollars. Of great significance, this transformation from deficit spending to accumulation of surpluses has resulted in a steady reduction of the size of Canada’s government debt, which has declined from its peak of C$583 billion in 1997 to a fiscal 2006 year-end figure of just C$514 billion and estimates for the current figure are right at C$500 billion.

American figures are moving in the opposite direction. Following several surpluses in the latter Clinton years, the U.S. has resumed deficit spending with a vengeance and the current annual figure is near US$250 billion. The U.S. National Debt has also been exploding upward, and has just passed through the nine trillion dollar mark, breaking records with every passing month.

When the budgetary deficit, which must be financed with additional borrowing, is combined with the Balance of Trade deficit, now in the area of US$750 billion per year, it can be seen that American dollars are being created at levels that are truly historic, and it is our opinion that this flood of newly created Greenbacks lies at the heart of the decline in the value of the U.S. Dollar relative to all major currencies, including the Loonie.

Just how great has been the extent of that decline? The depth of that downtrend can be illustrated by one look at the long term chart of the “Eurocurrency”, which measures the Greenback against the most important worldwide monetary alternative (outside of gold and silver).

We believe that it is this decline, which in our opinion is likely to be extended during 2008, that lies at the heart of the huge rallies in gold and Crude Oil, both of which are quoted in U.S. Dollars. As long as the U.S. runs huge budgetary deficits, as long as it continues to expand its national debt which is now headed toward the unthinkable level of ten trillion dollars, and as long as the U.S. continues to run horrendous balance of trade deficits, it is difficult indeed to see any true strength returning to the Greenback. We see nothing in the news and financial backgrounds to indicate that there will be a serious reversal in any of these trends this year.

Ergo, it is our opinion that 2008 will be positive, perhaps spectacularly so, for the U.S. dollar-denominated price of both the precious metals group and the petroleum complex for the coming year.

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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