A Melman Minute — March 6, 2008

Once in a while, it is important for any publication to restate its broad underlying thesis as it relates to market activity in the precious and base metals, and, if necessary, to redefine that thesis as underlying conditions change sufficiently.

In the case of The Melman Report, simply stated, we have come to believe that the economic turmoil currently affecting the United States in particular is deeply rooted inside the gradual destruction of their currency since the direct convertible connection between gold and the Greenback was dismissed in 1933 by then-President Franklin Delano Roosevelt. It is also worth noting that virtually every other nation on earth has also dismissed gold backing for their own currencies as well, casting aside the money supply limitations imposed by convertibility into that “barbarous relic” as no longer relevant thanks to the emergence of Keynsian economics which states that government central banks controlling currency values is infinitely more adaptable and efficient.

In our opinion, the results have been horrendous.

One personal example in my own family life truly illustrates the point. When my father was called into service in the middle of WWII, he considered the matter of providing for his family at some length and decided on a $5,000 life insurance policy. His thinking was simple as it related to securing the financial future of his wife and their two small sons. In the early 1940s, a modest home could be purchased for about $2,500 and a decent new automobile for about $800. Therefore, should anything happen to my father, my mother would be able to purchase outright a new home and auto and have $1,700 left over for food, clothing, heating and other expenses which should last her about two years, by which time she would have had the opportunity to restructure her life and carry forward.

The numbers are laughable today. I just received a report that the average price of a home in Vancouver is $920,000! A decent, reasonably-equipped auto can run from $25,000 to $35,000! And, providing food, clothing, gasoline, heating, dental and optical care and other expenses for a mother and two children would more likely run over $1,700 per month instead of lasting for two years.

Are today’s homes, cars and services so much better than three generations ago? We don’t think so here at TMR. What we do think is that the purchasing power of each C$, like its American cousin, has been so eroded by the legally unlimited creation of new currency that the future value of each currency unit may truly decline toward zero as the quantity of currency units inflates toward infinity.

That is the concern we have and, when we look toward America’s giant economy, we are watching two indicators in particular. First is the “DX Index” which directly reflects the value of the American Greenback when compared to a selection of other major currencies. It has just hit the lowest level in the history of the Index, registering a low this morning of 73.09 (see chart).

The second indicator is the “TYX Index” which measures the interest rates at which U.S. government 30-year bonds are traded in the financial marketplace. In theory, as inflationary expectations for the long term rise, investors will begin to demand higher rates of interest to compensate for that rising price inflation - and much of that price inflation, we believe, will be directly reflective of the decline in the purchasing power of the dollar as measured by the DX Index.

During recent years under Fed Chairman Greenspan - and during the last two months in particular under new Fed Chairman Bernanke, attempts have been made to drive U.S. interest rates lower in order to support the economy in general and the troubled housing industry in particular. Recently, despite the best efforts (and they have been dramatic!) of Bernanke to drive interest rates lower, long term rates, as reflected in the TYX, appear to have bottomed and seem ready to move higher.

These two indicators should give us a firm idea of the success of the Fed’s latest ventures. If the dollar grows stronger and long-term rates turn lower - then we will be filled with admiration for the success of the Fed’s work. However, as in our opinion appears much more likely, the dollar declines further and scared investors force long term rates higher, then a serious of traumatic and potent difficulties associated with the unwinding of currency values may lie ahead - and they can be dramatic indeed..

Two examples should suffice, one from almost a century ago and one from today’s headlines. In Germany, during 1923 the value of each German Mark fell so fast that it took millions - and then billions - of Marks to buy a postage stamp which two years earlier had cost a single Mark. In our time, inflation is so bad in Zimbabwe under Mugabe that it is almost beyond measures, but reports now indicate that the American Dollar is now worth more than one hundred thousand of their currency units - and the number is growing wildly each day. Estimates put their inflation at the rate of over 100,000% per year.

We will keep our eyes closely on these considerations and report to you regularly.

In today’s markets, the precious metals are undergoing some strong selling with gold down about US$20 into the US$970 area and the Platinum Group Metals being particularly hard hit with Pl down about US$80 and Pa down about US$40. Given the almost straight-up rise in these commodities, some serious selling was bound to be encountered - but the long term trends remain solidly higher. Crude oil hit a new high of almost US$106 and financial markets have opened lower with the Dow Industrials down about 140 points while the TSX, reflecting the selling in the metals, is down close to 200 points.

One of the major news headlines this morning screamed out that “Foreclosures at New High in Fourth Quarter 07”.

We plan to look closely at the US housing market in tomorrow’s Melman Minute.

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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