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.
It appears that some of the most dramatic market moves of the past two weeks appear to have abated, at least for the mini-moment as securities markets have stopped declining sharply and currency markets have put some distance between the earlier turmoil of the past few days. This gives us a bit of 'quiet time' to reflect on the recent upheavals.
WERE THE FINANCIAL MARKET DECLINES JUSTIFIED?
As we have pointed out recently, there is a long history of financial markets and precious metals markets moving in generally opposite directions. Therefore, the question of whether the recent financial markets' declines are likely to continue is of considerable importance and one of the prime factors in our analysis is the outlook for future economic growth - or the lack of same - in America and other major economic nations.
Two of our favourite primary commodity charts may be signalling that some significant troubles could indeed lie directly ahead for America's economy. These are "Dr. Copper" and lumber.
Once again the price of copper is working is working its way lower toward important chart support near the $3.00 level. In fact, the copper chart reminds us of the gold chart during much of 2012 in terms of that metal's support level near $1,500 to $1,530. When that gave way, gold fell by a quick $300 to under $1,200. We can only wonder if copper is about to repeat that type of sudden decline. If it does indeed fall sharply, that could be an indication that the world's economies face some manner of future weaknesses which, presumably, would be reflected in lower financial securities markets.
The short term chart for lumber also appears to be suggesting some economic difficulties may be developing as it would appear that the construction world should be booming given ultra-low interest rates which recently have fallen sharply and forecasts of major economic recoveries. Presumably, this combination should have resulted in rising demand for lumber, but the prices have actually stabilized and then headed generally lower over the past six weeks.
There are other potentially serious economic troubles which may be of deep concern to major market investors, both in America and abroad. In fact, a lot of printing ink and media time has been devoted to such trends and we list a few of the more recent developments here.
One of the earlier negative reports came on January 10 when the U.S. Department of Labor reported a much weaker December jobs report than had been anticipated. This was followed up on January 23 when word of sudden currency troubles in Argentina was announced. On January 25 a report showed that new manufacturing contracts in America declined sharply during the December reporting month. January 28 saw the release of data indicating a massive and potentially serious set of devaluations in the currencies of several nations, specifically including Argentina, Turkey, Brazil, Venezuela, India, South Africa and others.
Next came word on January 30 that the collective economies of the European Economic Community were suffering a reduction in their growth rates coupled with the threat of outright disinflation when that bloc`s leaders were actually desiring an increase in inflation.
On top of all that, serious questions were being raised about the Chinese economy which has been of such vital importance during the past two decades. Yet another consideration - and one of potentially significant importance - is that many investors may be coming to the belief that the great securities bull market of 2009-14 may be at an end and they are stepping up their selling in order to 'lock in' profits.
All of these considerations began to negatively impact stock quotes around the world, with Japan`s Nikkei Index taking a particularly large 'hit' by declining about 2,000 points - or more than 12% - in just nine trading sessions. (see chart)
A particularly important report - the US Department of Labor January job figures - will be released early Friday AM. We plan to report on those numbers in Friday's Melman Minute.
SOUTH AFRICAN GOLD PRODUCTION AT RISK
One factor which may be turning in gold's favor relates to overall supply and demand. Few nations have contributed more to gold's supply over the past 150 years than South Africa, so it is big news when new supply from that nation is threatened, but that may indeed be the case as growing wage demands could be cause many marginal mines to become unprofitable and lead to their closure. In addition, South Africa's government has imposed several conditions over the past few years which have resulted in sharply diminished foreign investment into that country's mining industry.
The wage demands are a particular concern as illustrated by the sizeable demands of platinum workers union leaders who are calling for a one-on increase of wages in that industry to a starting wage of US$1,109 per month from the present equivalent of about US$ 450 per month.
Given the threat of such wage increases combined with the government's continual demands that workers be simply handed increasing shares of company equity, new foreign investment in South African mining ventures is drying up and low metals prices combined with rising costs are preventing domestic mines from making major investments, it appears likely that gold and platinum production in South Africa will continue to decline into the future.
By simple economic reasoning, a decline in supply without a commensurate decline in demand should move markets toward higher prices over time.
US DEBT CEILING TIMETABLE
Another major US Congressional debate is about to unfold as President Obama insists that an upward extension of the US Debt Limit be quickly approved while Republican leaders are calling for conditions before they will vote in the House for a debt limit increase. The two sides appear to be far apart as time pressure builds.
Congress recently extended the time limit until February 7 - just two days away, but accountants say there is sufficient room within government accounting procedures to allow payment of the government's bills until the end of this month. Beyond that time frame, some are predicting a new form of fiscal Armageddon.
As described in a Wall Street Journal article yesterday, both sides remain at loggerheads with Administration officials saying, "...they won't negotiate budget or policy changes in exchange for an increase in the debt ceiling, but some Congressional Republicans have said they would agree to an increase only in exchange for spending cuts or changes to the Affordable Care Act, among other things."
Time is running short for a resolution.
As of 8:30 AM PST, financial markets have been churning through wide moves with the Dow Industrials variously up a bit, then down 80, then up 30, then down 80 again. At this moment, the Dow is down by about 20 points while the TSX Index is also off by around 20. Gold enjoyed a sharp early rally to above $1,270, but has settled back since to $1,259 while silver has gained a strong 37 cents to $19.88. Base metals are slightly higher on balance and mining share indexes remain close to unchanged.
In other markets, the US$ Index is off 11 basis points to 81.11; Crude Oil is down 11 cents to $97.08 and the TYX Index of rates on US Treasury 30-year bonds is up 40 basis points to 3.633%.
All quotes US$ unless otherwise indicated.
Next Melman Minute scheduled for Friday, February 7 when we plan to review the latest job creation figures for the USA.