A Melman Minute — March 3, 2008

Live from PDAC in Toronto

Analysts at the convention have offered many explanations for these astonishing numbers and some of the more important include:

China's continually expanding economy with its rapacious demand for raw materials of all manner.

America’s housing market declines accompanied by various meltdowns in the world of international credit.

Major weakness in the world’s reserve currency, the American Greenback

Rising foreclosures spreading across the real estate spectrum.

Rapidly expanding energy costs in all segments of the economy.

Growing lack of confidence in securities markets.

Growing list of failures in the enormous derivatives marketplace, which few people understand but which is spreading fear and panic among those who do.

It is not a pretty picture, with an array of problems assaulting the public consciousness from virtually every direction, and an array which is seemingly immune from easy answers. The only remedy which seems to occur to the Federal Reserve Board is the relentless spread of easy money throughout all levels of society.

The difference that occurs to us is that this time around, things may indeed be different from previous periods of monetary difficulties in the form of the sheer magnitude of monetary aggregates. Compared with 1980, the American national debt stood at just above $1 trillion and it is now almost $10 trillion!. Total money supply stood near $2 trillion - it is now in the area of $13 trillion! There is a limit to what the Greenback can absorb in the way of new monetary creation before the world begins to reject it as a value-holding currency, and we may be approaching that limit.

The basis for this belief is that with an annual Balance of Trade Deficit of approximately 800 billion and a budgetary deficit of nearly $400 projected for the coming year, this will necessitate the creation of about $1.2 trillion new dollars just this coming year alone! The great question is how long the world will continue to watch this situation unfold and worsen, and yet retain their foreign holdings and cash reserves denominated in U.S. Dollars. Signs have begun to appear recently from the Middle East, Japan, Russia and China that serious currency alternatives are being actively explored.

Another topic coming in for discussion related to the supply of new mine production. Economic common sense would seem to indicate that as prices rise relentlessly, those higher prices would stimulate exploration and production would increase dramatically. The increase in exploration expenditures has indeed taken place - but the discovery of new major finds simply has not!

As major producers 'burn through' their reserves, they have become desperate to replace them, and the chosen new method is to merge with other existing producers or buy them out in order to acquire those new reserves. However, this does not improve the total supply picture at all, and a looming reduction in supply opposite what appears to be a pattern of steadily rising demand could further exacerbate the upward price movements in may commodities.

Markets in Asia and Europe sold off overnight and both America and Canada have followed. After opening lower, the Dow Industrials have managed to return to unchanged after about one hour of trading and stand near 12,300, precariously balanced just above a point of new breakdown (see chart), while the TSX is ahead by almost one hundred points, thanks to higher metals and crude prices. Crude itself just crossed to a new high at about $104 and the U.S. Dollar Index has made a new historic low at 73.53.

Much more to report on from PDAC tomorrow AM

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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