A Melman Minute — February 1, 2008

Well, a new month to look at, but one cannot help but be reminded of the old saying, “the more things change, the more they stay the same.”

During the past few months, we have noted one of the great problems is the difficulty in obtaining reliable information, particularly from governments. One obvious example is the American and Canadian governments’ claims that inflation is virtually nil while we have encountered real life examples of robust price inflation over the past few years in areas such as residential purchase or rental, gasoline, heating oil, insurance, medical costs, hourly service rates, food and a host of other areas.

Now, this morning, we have encountered another example of the unreliability of government data. Last month’s American employment data released for December showed a gain of only 18,000 jobs that month, much below analysts’ expectations. Relying on that number, securities markets plunged. Just this morning, the Department of Labor announced January’s jobs number which indicated an actual loss of 17,000 jobs for January but, at the same time, they revised the December number of jobs gained upward from the previously-announced 18,000 - which was the basis for noting a .3% rise in the Unemployment Rate - to a solid 82,000.

To confuse matters even further, the highly-regarded Institute for Supply Management (ISM) Manufacturing Index was relatively bullish for November, but turned bearish in December by falling to 47 which is in recession territory. However, just this morning, while the Department of Labor was announcing job losses during January, the ISM reported that January’s index shot up back above 50! One can only wonder how the economy shed jobs but grew stronger at one and the same time.

In more than thirty years of being associated with precious metals, mining investments and economic data, your editor has seldom, if ever, seen a period such as the past two weeks with collapsing, then rising markets; fears of economic bust turning into expectation of robust growth; and interest rate moves of what can only be described as being of a panicky nature.

It is at times such as these that we are reminded of one of our favourite sayings from Winston Churchill, found in “The Gathering Storm”, the first volume of his monumental six-volume series on World War Two. It reads,

“Those who are possessed of a definite body of doctrine and of deeply rooted convictions upon it will be in a much better position to deal with the shifts and surprises of daily affairs than those who are merely taking short views, and indulging their natural impulses as they are evoked by what they read from day to day.”

How appropriate that message seems for the recent past. Each day we are besieged with contradictory reports, one declaring that we are headed into an imminent recession while another proclaims that business conditions will improve now that the Fed has acted so decisively. One castigates the Fed for not lowering rates earlier while another is equally derisive for the Fed having risked so much by lowering them now in the face of a weakening dollar and rising concerns about inflation.

So what are some our key concepts within our “body of doctrine and deeply rooted convictions”?

First, gold is money and paper is paper, and the latter makes a very poor substitute for the former.

Second, unlimited monetary expansion has been a hallmark of historic currency collapses of the past and we expect that will hold true for the future as well.

Third, the incredible level of monetary expansion we are now witnessing will likely result in continued debasement of the once-almighty (when it was backed by gold!) United States Dollar, until its roles as a reserve currency and as a reliable medium of exchange are called into question.

Fourth, that debasement will result in greater levels of investment risk in dollar-denominated debt instruments and, as a result, foreign and domestic dollar investors will demand greater returns - meaning HIGHER interest rates - before they will commit to those investments.

Inside the welter of economic data with which we are inundated on a regular basis, there are two clear indications relating to long-term interest rates. One is the comparison between short-term and long-term rates and the second is the direction of those long-term rates.

In the first case, it is reasonable that long-term investors would encounter greater risks over time than short-term investors and should, therefore, receive a greater return - and the difference between the return on long term versus short term rates can be an indication of confidence in the future. Recently, the difference between the two has been expanding, indicating long-term investors are becoming somewhat wary of the future.

In the second case, one look at the one year chart on the 30-year interest rate TYX Index shows that those rates have not followed short term rates downward, but rather have stayed relatively stable since November in the 4.3 to 4.5% zone, despite two cuts totaling 125 basis points (1.25%) in the Fed Funds rate.

Several markets have made dramatic moves this morning. Gold is sharply lower, having fallen from an overnight high near $940 to a trading low of $903 and rests near $910 after two hours of trading. Observers attribute this sudden selling to European interests unloading a large position. Silver remains strong just under $17.00 per ounce, platinum is rising to new highs near $1,770 and palladium has literally exploded upwards, rising by almost eight percent to the $412 range. Crude oil is trading near $90 and security markets rallied in early trading, then sold down somewhat. (all figures US$)

Apologies for making this MM slightly longer than usual, but we felt it was necessary to define some of our important concepts during this time of flux and uncertainty.

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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