A Melman Minute — February 27, 2008

WOW!!!!

How else can we capsulize what is going on ‘out there’??? After two hours this morning, gold is at a new historic high, sitting just under $960 (all prices US$) after having reached $965, silver has crossed above $19.00 per ounce, the US Dollar Index has plunged to its lowest level in history at 74.08, the Euro has crossed to a new record high above $1.51 and crude oil is holding above $100 per barrel.

And yet, despite the above, stock markets continue to rally with the Dow up by over 50 points and the TSX ahead by 15. At least the TSX is understandable with many gold and energy stocks prominent traders on that exchange - but one can only wonder what Dow investors are thinking.

Our own belief is that during 2008, all hell will be breaking loose! It is our strongly-held opinion that the monetary bubble which began in 1933 when FRD broke America’s backing of the US Dollar by gold, is in the process of disintegrating. The bubble took 75 years to form - and it will not break down in a day - but trading over the past seven years in the U.S. Dollar’s most acknowledged international currency competitor, the Euro, shows that the processes of erosion of the once-almighty Greenback are clearly underway.

Historically, election years are positive for financial markets and this one may hold somewhat true to form - despite the horrendous January numbers which are supposed to be indicative of the year as a whole - but once the new Congress convenes in January, 2009 and real actions must begin to take place, then all we can think of noting is that a prudent investor should be prepared for a possible securities market meltdown. We would also note that prudent analysts may not stick around until 2009, if they see a true avalanche of selling developing, and may use the last half of 2008 to exit some or all of their holdings.

The times appear to qualify for extreme caution on the financial side, and significant opportunities on the metals side.

As we have previously pointed out, one of the prime philosophical building blocks of our overall position is that the once-overwhelming position and power of the United States, both militarily and economically, is gradually deteriorating. Since the status quo of the world has been built on that nation’s power and prestige, any change in that status quo could be upsetting, even critical.

Anyone who has ever played chess on a serious level knows that ‘checkmates’ do not normally arise on the spur of the moment. In fact, most well-played games involve numerous well-planned preliminary moves which gradually build up one’s position until, at some later time, the latent power of that carefully built-up position enables the execution of ultimately game-deciding maneuvers.

Watching both China and Russia in action is beginning to look like two teammates in the early stages of carefully building up their positions, so that at some later date, they might be in a position to take over real power from a gradually weakening America.

Economically, both China and Russia are acquiring huge mountains of ASSETS while the USA is floundering under an ever-expanding ocean of DEBTS. Russia is acquiring theirs through the expansion of their fossil fuel production while China continues to lead the world in exports of produced goods and services. In each case, reserves of foreign monetary wealth are pouring into both nations.

Military, the situation could be ever more dramatic. Russia has been enlarging their military budgets at an alarming rate. According to figures provided by GlobalSecurity.org, from a mere 110 billion rubles ($3.5 billion) in 2000, their military spending multiplied seven times over to reach 775 billion rubles ($31 billion) in 2007. Given that Russia’s economy is based to a large extent on energy and metals exploration and production - and revenues from those sources are expanding rapidly - it would appear likely that further expansion of military expenditures will take place.

If that were not enough, Russia is also becoming a leading arms exporting nation, and one of their best customers is America-hating Venezuela. Another is Iran!

China’s military growth has perhaps been even more dramatic than that of its northern neighbor. Robert D. Kaplan, contributing editor to Atlantic Monthly magazine and a noted author of several books on the military-geopolitical world scene, told a Calgary audience last week that the balance of power in both the Indian and western Pacific oceans is shifting away from the USA and toward China. He sees this as “…part of the imminent and vast reorganization of world power.”

He predicted that, “…The Chinese will field more warships around the world than the U.S. in a few years…” Kaplan attributes the source of China’s renewed strength to their economic development, noting that the USA achieved the same kind of domination when their economy grew so spectacularly between their Civil War and the two world wars.

Suffice it so say that the entire balance of world power is undergoing the early stages of a seismic shift - and one we believe will not be favorable to American or European interests.

Perhaps that is a true underlying reason for the spectacular recent performance of gold.

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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