A Melman Minute — March 12, 2008

Well, things quieted down abruptly following the fireworks of yesterday, a day which saw the Federal Reserve Board and other national central banks ride to the rescue of a fractured and bedraggled world financial system. At least, it appeared that way to many, and the world’s stock markets roared ahead with the Dow Jones Industrials soaring by over 400 points and the TSX, Asian and European markets following suit. In this morning’s trading, the Dow is offering more of the same, having risen about 90 points in the first 90 minutes of trading. However, the TSX in Toronto is slightly lower in the same period.

There is one aspect of yesterday’s rescue plan which could be of considerable importance to mining share traders and metals investors. We are referring to the virtual guarantee by the Fed that they will do anything to avoid the painful consequences which would normally ensue from the fracturing of a tremendous credit bubble - which is what we have been watching for the past several months. “Helicopter Ben” Bernanke, the relatively new Fed Chairman, appears to be living up to his nickname indeed, referring to the comment he once made that he would be willing to drop dollars from helicopters if necessary to keep the economy from falling into recession or depression.

Our specific concern relates to the expansion of the money supply which has been ongoing at an ever-accelerating rate. Despite the fact that the U.S. discontinued publication of M-3 figures (M-3 being the widest definition of money stock) in 2006, private economists have been able to continue that data series by computing each individual segment of M-3 and thereby creating a substitute number. What they have found is that the money supply of the U.S. has been expanding at a rate of more than fifteen percent per year during the past twelve months. Bernanke’s recent announcement could easily increase that rate.

We are of the opinion that the net result of this expansion will be accelerating price inflation which will then drive long term interest rates higher as investors seek compensation for the anticipated reduction in the purchasing power of their funds. Higher interest rates would crush whatever strength remains in housing and auto sales, further depressing the American economy and, like a whirlwind, driving the Fed to take ever-more stimulative measures which would likely compound the problems.

If that scenario were to play out, and in our opinion there is a genuine likelihood of exactly that occurrence, then history tells us that gold, silver and platinum should move higher for monetary reasons relating to the precious metals role as a storehouse of monetary values.

Surprisingly, therefore, gold actually sold off immediately following the central banks’ announcements, but rumor has it that the IMF was strongly hinting of future gold sales, which indeed depressed gold’s market yesterday. This morning, however, gold is once again advancing toward the all-important (psychologically) US$1,000 level and is ahead by about $9.00 (all figures US$), with spot gold trading near $982 at 8:00 AM PDT. As the chart of the Streettracks Exchange Traded Fund (ETF) on gold clearly shows, the yellow metals is once again near the record high levels of last week.

In other markets, crude oil continues to soar, trading near the $109 per barrel level and quotes on refined products such as heating oil and gasoline are now moving rapidly higher. In fact, heating oil just reached the unthinkable $3.00 per gallon level, a price which is more than triple just three years ago and which will put tremendous pressure on home heating budgets for those living in colder climates, such as the hugely populous northeastern U.S. and eastern Canada.

It will be most interesting to watch markets as they settle down over the rest of this week and absorb the impact of what has just taken place. However, we would point out that in our opinion, the long-term factors which could drive the precious metals sharply higher not only remain in place, but they have been enhanced.

One last note. Currency markets have not taken this new ‘easy money’ action by the Fed lying down as the DX Index, an important measure of the U.S. Dollar’s strength, has just plunged to a new historic low level at about 72.59. Just a few years ago, that index number was above 120!

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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