A Melman Minute — January 22, 2008

What an unbelievable twenty-four hours we have just seen regarding markets of all manner.

First, with American markets close yesterday, the focus was squarely on Asian, European and Canadian markets and the news was dramatically bad with exchanges in Australia and Japan registering overnight drops of five and six percent. European markets then joined in the fray with virtually every one of them declining by four to seven percent and then came Canada's turn.

Both the TSX and the TSX-Venture plunged dramatically, the TSX by 605 points - or about 5 percent - and the Venture by 235 points - or NINE PERCENT!

Then, feeding on the selling frenzy, Asian markets once again fell sharply last night, with the Japanese Nikkei adding another 750 point decline to the previous session and the Australian exchange falling by a historic 400 points. Europe began to follow in the same pattern when the American Federal Reserve Board took powerful action, dropping the Fed Funds Rate by a huge THREE-QUARTERS of a percent, and the changes in market psychology came swiftly.

Based on earlier Asian and European trading - along with Canada - the Dow Industrials were expected to drop by 800 to 1,000 points at the openings, but instead opened down 'only' 460 points, and then rapidly improved to the point where they were almost even less than two hours after the opening. The amazing moves in the Dow over the past two weeks can be observed on that index's ten day chart.

But the truly dramatic move was in GOLD. After hitting an overnight low of US$849.50, gold began to focus on the implications of the Fed move and, in those same two hours, had soared by FORTY-FIVE DOLLARS to the mid- US$890s. Mining shares began to move higher and both the XAU and HUI mining share indexes recovered their early morning losses and were solidly on the plus side.

Ironically, these were the specific subjects which had been analyzed by a host of experts at the just-concluded Cambridge House Resource Conference in Vancouver at which your editor was a participant. Among the concepts which were discussed was the supposition that the Fed had no safe course. If they chose to inflate the money supply to drive interest rates lower (the course they have obviously opted for) then the immediate risks were a weakening of the dollar and firing expectations of substantial price inflation into the future, which would ultimately drive rates higher, not lower. However, if they simply did nothing, the economy appeared to be headed for collapse.

During our Monday AM presentation, we noted that one of the factors which kept the economy from collapsing in early 1980, an expectation which had been a major reason behind the dramatic rise of gold from 1976-80, was the iron will of the incoming Reagan Administration. They had the guts to drive interest rates HIGHER in order to shrink the rate of growth of the money supply. That action involved a great deal of short-term pain, but it set the stage for restoration of the financial base which allowed for a high level of prosperity during the ensuing two decades.

It is now apparent that today's monetary authorities are not of the same ilk as Paul Voker, Ronald Reagan or Donald Regan, Reagan's Secretary of the Treasury. Instead we have George W. Bush, Ben Bernanke and Secretary Paulson - none of whom seem to have grasped the long-term implications of the monetary dilemma facing America.

That is one of the reasons we are maintaining our long-term bullish stance on precious metals. We would also add that the Fed's actions may induce a rise in general economic expectations over the near term and that could benefit the base metals as well.

In other markets, petroleum mirrored gold's actions by dropping sharply overnight, but rallying strongly on the Fed news.

One additional note. Conferences such as the just-concluded Cambridge House gathering are invaluable for the mining share investor. Not only does he/she obtain the latest information regarding the monetary and political background and how that is likely to affect the metals, but there is also the opportunity to consult with over 400 mining companies themselves, receiving the most current and detailed information regarding those companies.

Upcoming conventions worth considering are the Cambridge House gathering in Phoenix in February, the giant PDAC convention during early March in Toronto and the Cambridge House Calgary conference in April.

Consult the Cambridge House and PDAC websites for details.

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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