A Melman Minute — January 24, 2008

Last night, time finally became available to review all the financial publications which had accumulated in my writing studio during the recent Cambridge House Convention in Vancouver. What I saw emphasized a point that any good contrarian could easily make.

When news of an impending financial calamity moves from the financial section of a newspaper to the front pages, that occurrence frequently serves as an indication that a market reversal will occur shortly. Same thing is true when that ‘financial panic’ is also the main item on the radio and television newscasts. The past two days have shown that this time around has been no exception.

Monday’s market sell-offs were the primary headline material in scores of newspapers in the USA, Canada and abroad. By Tuesday AM, Bernanke’s surprise announcement helped turn the tide and on Wednesday, after a bout of serious selling early in the day brought about by the plunges in Apple and Motorola stock, the markets were able to move sharply higher, in the Dow Industrial Average’s case more than 600 points from bottom to top, reversing those losses and carving out meaningful gains before the close.

Of course, the important question remains whether the action of Tuesday and Wednesday heralds a great reversal of the entire bearish trends, or whether they are simply rallies inside an ongoing bear market. Factors to watch for on the various indicators include performance of the bank and mortgage insurance stocks, performance of the Greenback versus other currencies, and performance in gold, which historically has been the counter-measure to strength in the American Dollar and American economic stability.

This morning, gold appears to be filling that role as the U.S. currency is plunging against the C$, the BP and the EURO - and gold is soaring toward new record levels. During this morning’s trading, gold reached US$911 spot, just seven dollars short of the previous peak set two weeks ago. Silver and platinum also rallied sharply, along with the base metals which also showed strong gains.

Therefore, it appears that the U.S. Dollar is now the focal point to watch and we are including a chart on the U.S. Dollar Index to identify current important chart points. There is presently clear support on the chart in the ‘75’ area and overhead resistance from 78 to 78.5. A break below support would imply further dollar weakness, perhaps severely so, while a breakout above 78.5 would imply further dollar strength, at least temporarily.

Two important news stories of late relate directly to mining, one of which concerns the province of British Columbia - one of North America’s most active mining exploration and development regions.

First, the B.C. Minister of State for Mining announced that expenditures for mining exploration soared to C$416 million during 2007, a huge 56% increase compared to 2006. The Minister, Kevin Krueger, announced that there were more than 100 different projects ongoing with a budget of more than C$1 million each. Mineral production during 2007 totaled almost C$6 billion and there were 23 new projects pending production approvals.

The minister did sound a couple of warning notes, however. First, he was concerned about the rapidly rising rate of costs associated with mining and, second he also noted that much of this mining activity was dependent upon continuing resource demand from economically emerging nations and, if the rate of growth of their economies slowed down, that could adversely affect mining in B.C.

In our second story, difficulties with foreign nations once again took the spotlight as Argentina just imposed new export duties on metals production, thereby reversing a pledge to hold miners’ tax rates stable for thirty years. Goldcorp immediately announced they would halt exploration spending in that country.

Like many other countries, Argentina just could not resist the temptation to reach out and grab onto a greater share of mining revenues, despite the reality that they must have known that such action would alienate the very industry which had been increasing expenditures in that nation at a rapid rate during the past several years.

This is just the latest in a series of stories relating to nations such as Mongolia, Zambia and now Argentina - among others - increasing their tax rates on the mining industry. Perhaps this is one reason, combined with rising costs everywhere and future demand uncertainties, which have caused the mining shares to under-perform against the metals themselves. Using gold as an example, please note the following table which clearly illustrates the point:

(Note: Index numbers are daily highs for January 13 and intra-day highs so far on January 24. Gold prices are daily highs for February COMEX gold contract for those days.)

As can be seen, although the price of gold is within one percent of its all-time high, the mining share indexes are more than six percent below their peak levels. Clearly, something is worrying mining share investors.

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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