A Melman Minute — February 26, 2008

Debates here, debates there, it seems there are ongoing debates about the economies of the world and their effects on our world of precious and base metals mining everywhere. However, two subjects in particular stand out.

First, there is a tremendously important debate regarding whether an economic slowdown in America would automatically result in a slowing of the rest of the world’s economies. The subject is known as “de-coupling”, as in de-coupling the American economy from other important ones.

Second, while everyone with an economic eye can see that the current slew of economic reports on subjects such as housing, grain prices, foreclosures, manufacturing performance and so forth contains negative information, the great debate is whether the stimulative activities of the American government in general and the Federal Reserve Board in particular will be successful in forestalling - or entirely avoiding - a severe downturn in the world’s largest economy.

On the first count, opinion appears to be swinging toward continued growth, perhaps even dynamic growth, in many other economies even if the U.S. one slows down dramatically. As noted by Jacqueline Thorpe in the Financial Post, “…oil, copper, grain, the Brazilian Real and even the TSX are trumpeting the view emerging markets will continue to be a voracious source of demand.” The CRB Commodity Index, a composite reflection of demand for various commodities, has been setting historic record highs on virtually every day recently, providing apparent confirmation that the outlook for commodity prices has nowhere to go but up.

This growing confidence in the strength of emerging economies must be deemed a plus for the precious metals.

Regarding the debate about the future of the American economy, there has certainly been no shortage of negative news of late. Among the items pointing toward deceleration of that giant economy, perhaps even leading to a severe recession (or worse), we can note:

* - Business sentiment plummeting in early February

* - Housing prices continuing to fall

* - Credit markets tightening dramatically

* - Consumer sentiment indexes collapsing to their lowest levels in years

* - Foreclosures rising sharply

* - Retail sales slowing

* - Philadelphia Federal Reserve Index of Manufacturing Activity dropping sharply in both January and February

* - Mortgage applications continuing to fall

* - Food prices soaring, further reducing consumer discretionary income

News releases this morning would appear to be confirming the worst fear, that of stagflation, the simultaneous slowing of economic activity combined with rising levels of price inflation.

Today’s data includes a rapid rise in the rate of home foreclosures, up by fifty-seven percent in January compared to the year-earlier number, reaching the astonishing figure of 233,001 homes that are now under some form of foreclosure proceedings, up from an already-high number of 148,425 one year previous. Making the situation even more ominous is the reality that a new tidal wave of variable rate re-sets to higher levels will take place in May and June, threatening to dramatically increase the number of homeowners unable to meet their home mortgage payment obligations.

Additional information released today showed that home prices continue to slide as the Case-Shiller price index showed that home prices declined by a steep 8.9% in the Fourth Quarter 2007 alone, the sharpest decline on record for that index. Eight of the seventeen metropolitan areas showed double-digit declines during those three months. On the inflation side of the ‘stagflation’ concern, wholesale price inflation soared to its highest level in 22 years with the Producer Price Index rising by 1.0% in January alone and now soaring at an annualized rate of 7.5%. Food and energy prices were the leading factors in those increases.

However, despite all the gloomy details now flooding the financial media, a strange thing is happening in the financial marketplace. Many investors seem to be buying, demonstrating that while current information may indeed be on the bleak side, they have faith that the Fed’s recent remedies will indeed take hold and lead to advancing prosperity.

As can be seen on the 10-day chart of the Dow Jones Industrials, over the past three days sudden and powerful rallies have hit the markets. Friday afternoon, a strong late buying surge turned a negative day into a sharply positive one; yesterday another huge wave of buying sent the Dow up over 12,550 and this morning’s lower opening quickly reversed itself under yet another buying wave and the Dow just crossed above the 12,600 level, a net gain of almost 500 Dow points since the lows of Friday morning.

Clearly, not all is pessimism and gloom among financial analysts and stock investors.

From our particular point of view, it is most interesting to see gold within just a few dollars of its historic highs while the financial markets are surging. In fact, gold would likely be setting new all-time record highs over the past two days had it not been for rumors of possible IMF gold sales, rumors which knocked gold down from the low US$950s to a present reading of spot near US$940. Silver is setting new multi-decade recovery highs by passing above US$18.20 while platinum and palladium continue to advance hugely and retreat slightly. Grains are once again headed into the stratosphere while the petroleum complex is trading quietly this AM.

The picture is one of markets being in a period of great flux and perhaps it will take a few days before a clearer picture emerges.

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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