A Melman Minute
| By | Leonard Melman |
|---|
NOTE: It has been a distinct honour to have received an invitation to address the Financial Conference at the giant PDAC convention, the world's largest annual mining gathering, scheduled for March 2-5 in Toronto. My time slot is set for 9:30 AM, Sunday, March 2. We certainly invite all convention attendees or other readers residing in the Greater Toronto Area (GTA) to attend.
The most recent Wall Street decline is beginning to approach the 'serious' level by reaching the top-to-bottom milestone of more than 1,000 points on the Dow Jones Industrial Average, falling from a recent high near 16,600 to an early morning low today of below 15,500.
The important question remains whether this decline marks the onset of a full-fledge reversal of the 2009-14 bull market move of almost 10,000 Dow points - or whether this is just another 'correction' along the road to ever-higher records.
Given the tendency of precious metals prices to move in a contrary manner to those of the major financial markets, the question is directly relevant to our precious metals analysis and therefore bears close watching.
ENTER JANET YELLEN
The Bernanke era is over and the Yellen era is about to begin as the new Federal Reserve Chairwoman's reign officially begins today. Given the importance of the Fed in terms of America's economic performance and emphasis, her general philosophy could play a major role in economic developments over the next few years and I believe she will also have an important role to play regarding the future performance of both base and precious metals.
Analysts are pointing to moves in the interest rate area as being her primary early concern, predicting that if she raises them too soon she will possibly put a crimp in any economic expansion, but if she waits too long she may help re-ignite inflationary pressures. If she is to follow Bernanke's path, she will use unemployment rates as one of her guides since the Fed has already announced that a decline in the official Unemployment Rate to below 6.5% could be a signal to move toward higher rates.
Yellen's past public utterances give little indication that she will adopt any serious form of 'austerity', thereby putting her in league with her predecessor.
From our point of view, and in line with our "Melman Minute" of this past Friday where I speculated that the Fed's ultimate reaction to growing economic weakness would likely be more stimulation, I believe Yellen will be long-term positive for gold - until she proves otherwise by some dramatic shift away from her prior pronouncements.
There is another, long-term consideration which is worth noting. According to a Wall Street Journal article this morning, Hillary Clinton is the odds-on-favourite to win the Democratic nomination for the Presidency in 2016. Despite Barak Obama's low present approval ratings which could be interpreted as negative for the Democratic Party's next presidential run, I believe that a Clinton candidacy which would combine support from numerous women's organizations as well as other traditional Democratic Party favoured groups such as minorities, civil servants and government financial recipients would be very difficult to defeat.
During her college years, Hillary Clinton was known to be partial to Fabian Socialist thought and I suspect that she has not totally abandoned that manner of thinking through the years. Therefore, should she become President and Yellen remain as Fed Chair, that combination could effectively move America further "Left" in its economic thinking than many of us on the other side of the political equation would care to contemplate.
As if that combination wasn't enough to confirm our hypothesis that the Democratic Party generally favours mass stimulation by monetary expansion in order to solve economic problems, Nobel Economics Prize winner Paul Krugman, a darling of the Democratic Left, recently wrote in the New York Times that the currency crisis could lead to more troubles since, "...Turkey seems to be in serious trouble - and China, a vastly bigger player, is looking a bit shaky too. But what makes these troubles scary is the underlying weakness of Western economies, a weakness made much worse by really, really bad policies."
As he has written previously, Krugman identifies those "really, really bad" policies as too much austerity and not enough stimulation.
MORE ON ARGENTINA
Argentina has long been an important nation in terms of mining developments, with particular emphasis on those areas just opposite the Chilean border along the Andean Cordillera. Several companies are presently active in that region and, as such, recent developments in that important nation are of particular concern to the mining industry.
Frankly, in my opinion, there is reason for considerable concern that Argentina's currency problems - and they are serious - could spill over into regulatory assaults on the mining industry as that nation's leaders attempt to raise revenue from all possible sources. Not only that, but the threat of an imminent sharp increase in the rate of inflation could make mining cost accounting very uncertain going forward.
As recently as 2006, it took three Argentinean Pesos to purchase one US dollar - but that rate reached 6.9 pesos to the dollar in 2013 and just recently, the official rate was raised to eight to the dollar. Even worse, the black market rate in unofficial exchanges has now reached 12 to the dollar, strongly suggesting an imminent rise in the official rate, further devaluing the purchasing power of that currency.
The chaos that could occur if such devaluations continue is easily illustrated by the fact that for currency reasons alone, the price of an imported TV, for example, which might have been priced at 900 pesos in 2006, now costs 3,600 - a quadrupling in price. For mining economists, this presents severe problems as the cost of imported labour, machinery and supplies is exploding upward while for exploratory and development projects, there is no commensurate currency-driven increase in revenues from production.
Economic journalist Mary Anastasia O'Grady appears to have captured the rising levels of uncertainty in Argentina when she notes in an article datelined out of Buenos Aires; "President Cristina Kirchner's practices of expropriation, contract abrogation, export taxes and caps on utility rates have destroyed capital. Meanwhile, government spending as a percentage of GDP has doubled over the last decade. Neither foreigners nor locals want to hold pesos because the central bank erodes their value by printing too many of them. When that happens, there is almost no way to stop a foreign-exchange run on the central bank, an inflationary spiral and impoverishment."
From our point of view, this is yet another facet of a rapidly-growing international currency crisis; one which we believe, over time, will eventually serve to reduce confidence in ALL issuance of unbacked, fiat, paper currencies.
By the way, hasn't anyone in authority in Argentina ever heard of genuinely free markets?
As of 9:10 AM PST, financial markets in Canada and the USA have once again been selling off heavily with the Dow Industrials now down by more than 230 points while the TSX Index is off by about 150. Precious metals are putting on a strong showing this morning with gold rising by $16 to $1,262 and silver also gaining ground, now ahead by about 25 cents to the low $19.40s. Gold's daily chart now shows that the yellow metal has entered a trading range with support near $1,230 and overhead resistance at $1,280.
Base metals have declined moderately and mining share indexes are ahead by around one percent on average.
In other markets, the US$ Index is down 27 basis points to 81.12; Crude Oil is down $1.18 to $96.31 per barrel while long term interest rates continue to decline with the TYX Index off by 62 basis points to 3.560%, the lowest such reading since last July.
All quotes US$ unless otherwise indicated.
Next Melman Minute scheduled for Wednesday, February 5