A Melman Minute — August 9, 2007

Those who love market volatility must be thinking they woke up in heaven this morning. Gold, which had been rising, plunged $12 at the opening. Stock markets in the USA and Canada, which had been rising sharply and had rallied powerfully in the last hour yesterday, plunged dramatically at their openings this morning and oil, which only five days ago was making historic highs, continued its descent to the lowest price in several weeks. And then, to make matters even more interesting, following their bizarre openings - all those markets reversed themselves within minutes!

In recap, the TSX dropped almost 300 points at the opening, but by 7:45 AM PDT was down ‘only’ 90 - a net gain in just 75 minutes of 200 points. The Dow, which had opened down 250, gained back 150 points in the same period, and gold, after plunging at the opening, swiftly recaptured more than half its daily loss.

The intraday chart of the Dow clearly illustrates the kind of dramatic volatility which has encompassed the markets of late.

On a slightly different note, the dangers of making market forecasts came immediately to mind over the past two days. One of god mining’s heavyweights, Newmont Mining’s Vice-Chairman Pierre Lassonde, stuck his neck way out two days ago by forecasting the following at a recent “Diggers & Dealers” conference in Kalgoorie, Australia: “Gold’s time is coming. The price will have three zeroes. I just don’t know what the first number will be.”

As noted, the gold market took Lassonde’s forecast into consideration and then immediately plunged.

It is well worth noting, however, that we believe Lassonde’s reasoning is sound. He pointed out that the supply of newly-mined gold is gradually declining as new discoveries of major finds are not occurring at a sufficient rate to offset current production, licensing issues are slowing construction of new facilities and the jewelry market, buoyed up by purchases from China and India, is expected to rise this year.

He also noted that, “This bull market in natural resources will last a whole generation, that’s 20 years. China and India will have hiccups, but, no, they will not stop growing.” In the short run, he expected gold to rise to $750 by fall and $850 by year-end 2007.

BAD NEWS FROM PARIS

This morning’s sharp plunges in securities markets here and in Europe resulted from a dramatic announcement from BNP Paribas, France’s largest bank in terms of market capitalization, that it was closing three of its asset-backed securities funds because of problems in the U.S. subprime market. Their announcement comes just days after American brokerage firm Bear Stearns suffered major losses in two of its mortgage-related funds. The news sent shock waves through an already-nervous mortgage securities marketplace and European exchanges were down two to three percent across the board.

Our observation is that we are seeing the leading edge of a growing problem in derivatives, a term used to identify trading vehicles removed by degrees from the initial asset. An example would be stock options which make exaggerated moves based on the movement of their underlying securities. In the case of all derivatives, movement in the underlying security itself becomes exaggerated by degrees as you move outward from the original asset.

When those assets move in your favour, the rewards can be immediate and dramatic. When they move against you, as has been occurring of late in mortgage-backed securities, the effects can be devastating. Just ask Bear Stearns and BNP Paribas.

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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