A Melman Minute — January 10, 2008

It would seem reasonable to anticipate at least a short-term correction in the price of gold after the strong rallies since Christmas and, for a while at least, it appeared that today was going to be the day. Gold dropped sharply at the opening, down to US$872, but it immediately reversed itself and is trading near US$884, up five dollars on the day as of 7:00 AM PST as the assault on the US$900 level continues.

As long-term readers know, it is our opinion at The Melman Report (TMR) that gold prices are headed much higher over the next several years, perhaps even spectacularly higher, due to a convergence of circumstances that truly threaten to blossom into a full-blown financial panic. Some of these circumstances include: a meltdown of real estate values in several nations, most prominently the US; severe pressure on international banking, credit and insurance systems; plus relentless pressure toward higher petroleum prices over time - while the American consumer in particular is facing a steep erosion of his/her discretionary buying power.

This morning’s news wires carried three stories which seem to confirm these trends.

First, Retail sales for the Christmas season in America turned out to be dismal indeed and the reports also showed clearly that the average American’s discretionary spending ability was contracting.. Macy’s, America’s largest retail chain which aims its promotions toward a higher-income buyer, saw sales fall a stunning eight percent from the previous year. Target Stores, which caters more to a middle-income crowd, saw their sales down by five percent. Wal-Mart, which definitely caters to the low-price crowd, did see its sales rise during Christmas, but buy a disappointing rate of only two percent. Clearly, the American consumer, laden by debt and seeing their storehouse of real estate equity values steadily diminishing, is beginning to pull in their buying horns.

Unfortunately, it appears that the retailers’ stocks are beginning to resemble those of mortgage lenders, banks, credit insurers and home builders. One look at Macy’s chart for the past two years clearly indicates the loss of confidence by investors in the retail industry as that retailing giant has lost more than fifty percent of its value in the past year.

Second, the credit, banking and insurance debacle continues to accelerate. Both Citigroup and Merrill Lynch, two giants in their industries, both announced that they are negotiating for further capital injections from overseas investors. Citigroup stated they were negotiating with an “international group” for the infusion of ten billion dollars of additional capital while Merrill Lynch named a group of Middle East investors from whom it is seeking an additional three to four billion dollars. Please consider that these amounts are in addition to the staggering amounts recently raised - and they also indicate the vulnerability of America’s financial structure to being overtaken by foreign interests.

What makes the situation for both these giants particularly significant is the reality that Citigroup is the world’s largest bank and Merrill Lynch is the world’s largest brokerage house and each has had their market capitalization CUT IN HALF during the past year. The chart of Citigroup clearly illustrates the horrendous damage which is showing up in hundreds of thousands of investment accounts worldwide - putting further pressure on already-beleaguered consumer discretionary incomes.

The third item deals with petroleum. India’s Tata Motors today unveiled their economy car, known as the “Tata”. It is small, fuel efficient and, above all, CHEAP, with a planned selling price in the range of US$2.500, which opens the doors to a tremendous market for tens of millions who desire to drive, have some available income, but could not afford most vehicles on the market today. Tata expects to sell several million to begin with, and ultimately, tens of millions in India alone. While the vehicle is expected to get about 55 miles to the Imperial gallon - or 45 miles to the US gallon - this still represents a huge increase in demand for gasoline, on top of an already perilous worldwide supply/demand situation. The likely result will be sustained pressure on the prices of both crude oil and refined unleaded gasoline.

And so it goes as a tidal wave of news continues to indicate growing troubles ahead. One specific category of news items deals with what might be an onrushing recession and tomorrow we plan to take a look in that direction.

After about one hour of today’s markets, sharp opening sell-offs in the Dow and the TSX were followed by some strong buying with the Dow rising to the ‘unchanged’ area after an opening loss of 100 points while the TSX about half of an opening 140 point loss. As mentioned precious metals sharply after some initial selling while the base metals trended lower on fears of a looming economic slowdown.

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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