A Melman Minute — January 29, 2008

All metals markets are either consolidating recent gains (gold, platinum, palladium and silver) or advancing strongly this morning (copper, nickel, lead and zinc). Apparently, both groups are benefiting from the latest monetary actions by the Federal Reserve Board as the precious metals are presumably advancing on expectations that loosening monetary controls will lead to dollar devaluation and/or rising inflationary expectations, while the base metals are moving strongly in anticipation of improving business conditions, at least for the short term.

Securities markets also appear to be influenced by improving expectations as the Dow is up about 60 points after two hours of trading. While it still remains far below the previous high levels near 14,200, it has re-gained about 1,000 points since the panic lows of the past two weeks.

Having just returned from the “Roundup 2008” convention at Vancouver’s Bayshore Convention Center, we can tell you that interest in mining’s productive end has never been higher. Attendance at that annual convention has risen from barely 2,000 in 2002 to 6,000 at this year’s gathering. Virtually every square meter of the convention center was covered with booths and exhibits offering every imaginable mining service or product, and several junior and senior mining companies exhibited there as well.

The convention also served as a showcase for British Columbia’s political establishment to showcase their significant efforts to promote mining in British Columbia One major accomplishment was the public introduction of “Geoscience BC’s QUEST” geologic data compilation. This project was originally funded by a C$25 million contribution from the British Columbia government and has since been enhanced by additional contributions from private sources. (Additional information at their website, www.geosciencebc.com)

However, the great question for this observer is whether the government is so committed to mining that they will be willing to overcome ongoing environmentalist and aboriginal community objects to various projects; objects and obstacles which increase the costs of developing new projects enormously and which also raise the level of uncertainty and risk. We also cannot help but note that Canadian Resource Minister Gary Lunn and British Columbia Minister of State for Mining, Kevin Krueger, pledged once again to simplify the entire mine permitting process. A skeptic might note that we have heard this story many times before, but the process still remains complex, uncertain, brutally expensive and involves numerous differing bureaucracies which frequently offer conflicting instructions and requirements.

Our opinion that gold is in the developing stages of a potentially monumental bull market is based in large part on our interpretation that the unimaginably huge price increases in worldwide residential and commercial real estate constitutes perhaps the greatest single financial bubble in history, and one that is due to ultimately collapse.

An important piece of evidence supporting this conclusion was the just-released fourth annual “Demographia International Housing Ability” survey, prepared by consultants Wendell Cox and Hugh Pavletich. The survey is primarily concerned with affordability of residential real estate around the world and notees that prices in many highly populous cities are severely excessive when compared to standard measurements of housing affordability. They concluded that in 46 different cities, the price of the median private residence is now priced over six times median household incomes.

To place that in context, if a ‘median’ family earns $50,000 per year in those cities, the median residence would be priced at over $300,000. By historic standards, there is no way a family with gross income of barely $4,000 per month can afford to pay taxes, food, medical coverage, clothing, entertainment, transportation, utilities, debt installments, incidental expenses and job-related costs and still be able to afford a home at that price level. Half that price would be a conservative estimate of true affordability.

And yet, in no less than twenty metropolitan areas spread across America, Australia, Britain and Ireland, median homes are priced at 7.5, eight, nine, ten and even 11.5 times median income levels. Prices have been sustained only because previous sellers of profitable homes have been able to afford new and higher-priced ones and some investors continue to buy real estate purely for speculative reasons - but that can only be a narrowing market as the broad, wage-earning public is forced out of the residential marketplace - and that is happening worldwide, particularly as it regards the formation of new households and those attempting to enter the residential market for the first time.

It is our opinion that the collapse in real estate values in America is a long way from over and, even worse, this collapse will begin to spread internationally, bringing with it potential chaos in the financial markets.

The possibility of this potential havoc could indeed be one of the underlying reasons for the enormous gains in gold during the past year.

One last point: much has been made about the ‘recovery’ of financial stocks which had been brutally beaten down during earlier months since Bernanke’s announcement regarding the three-quarter cut in rates. In point of fact, that recovery has been somewhat less than robust, and we are including a chart on one of those institutions, MBIA, Inc., the major bond insurance house, toi illustrate the point.

As can be seen, the stock plunged from $76 to $6 and the recovery to the $16 level has barely made an impression on the chart. There is a long, long way to go before anything resembling their old market capitalization can be restored. (all prices US$)

In other market action, the U.S. dollar is weaker against the C$, British Pound and Euro while the oil complex is slightly higher.

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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