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 inflationary picture has taken on a more positive tone over the past few weeks by action in the Crude Oil trading pits. As the chart clearly shows, the price of Crude has once again breached the $100 level and, more important from a technical point of view, the pattern of "higher bottoms" for the past five years continues uninterrupted.
Some observers credit improving economic prospects such as America's recent drop in their Unemployment Rate to 6.6% as evidence on future increases in demand while others point toward continuing serious problems in Venezuela's production performance as an indication of future supply questions.
In any case, rising petroleum costs historically have been a prime indicator of higher future consumer-driven inflation rates.
VENEZUELA - SOCIALISM ON DISPLAY
I recall a luncheon of about four years ago when a leftist-leaning friend turned the conversation toward the 'wonderful' works being accomplished by Venezuela's openly Socialist head man, Hugo Chavez. He waxed emotional about how the Venezuelan people now had a leader concerned about the general public's welfare while also being also willing to stare down international capitalism.
Given Venezuela's current state of affairs under Chavez' hand-picked successor, Nicolas Maduro, my friend might wish to reconsider some of his glowing statements as, in my opinion, Venezuela is descending into some form of Socialist hell.
Not too many years ago, before Chavez and his socialist revolution, Venezuela had a thriving petroleum industry; a generally rising consumer-driven economy which induced several companies to establish manufacturing facilities; and a mining industry which was becoming heavily invested in exploration and development.
Today, Venezuela's petroleum industry is failing to deliver strong returns to the country, one industry after another has fled the nation thanks to policies of nationalization and property confiscation and the mining industry - despite immensely favourable geologic prospects - is virtually gone from that country. In addition, currency woes are threatening the very ability of the government-dominated economy to provide some of the bare essentials of modern life, a trend exacerbated by price controls which have created goods shortages.
Perhaps even worse, the government is making it increasingly difficult for the electronic and print media to provide the public with any views which conflict with government dogma. For example, a recent article datelined out of Caracas tells us of the perilous state of that nation's newspapers where 12 have shut down recently and another 15 are in danger of closing due to a shortage of newsprint without which they cannot function.
The newsprint dilemma relates to the position of the host currency, the Venezuela Bolivar. As noted recently in this space, the Bolivar has been plunging of late and, as it becomes increasingly discredited, the black market quotes for the currency are falling - that is, it takes more Bolivars to purchase 'hard' currencies such as the US Dollar - than 'official rates' would suggest. The difficulty for many papers is that they must buy hard currencies on the black market because the government refuses to accommodate their needs at the official rates, but then must use those Dollars to purchase needed paper from international suppliers. This drives up their costs relative to the selling price of the papers for which they receive Bolivars.
Not surprisingly, the government of President Maduro has used this situation to refuse to help hostile papers while accommodating those which are much more editorially friendly, giving him additional political leverage.
In our opinion, using Socialism to provide benefits for the Venezuelan economy has been an utter failure - but we must note that several other Latin American nations, specifically including Cuba and Bolivia, continue to move their nations in that direction and one other, Brazil, seems headed down the same path as information is being relayed that Brazil's banking establishment is now lending Cuba immense sums of cash, ignoring the fact that it is highly unlikely those loans will ever be repaid, given Cuba's woeful payment record on other outstanding loans.
In the larger sense, we truly believe that Socialism does not work, that it does much harm to economic infrastructures and most nations attempt to resolve those damages by tinkering with their home currencies, usually in the direction of the three 'D's of debt, devaluations and debasements.
It is our belief that ultimately, this force will become more powerful into the future, increasing the odds of a major precious metals bull market.
WAGE WAR ON THE WAY?
It is beginning to look like 2014 will be an important year in the battle over wage rates, with the early indications seemingly pointing toward increases down the road. We have already seen where several national, state and provincial or even local governments have moved toward raising their minimum wages - some in extreme cases almost doubling - and it now appears that a huge push toward higher civil service wage increases is underway.
One of the underlying reasons seems to be the rationalization that union leaders were willing to accept low wage increases during a period of economic trauma as some sort of civic duty, but now that prosperity is believed to be on the way, they are ramping up their demands accordingly. However, since several governments are still steering a path toward austerity, a clear conflict of interests is being set up and we believe the net result could have a significant impact on overall inflation rates which historically have been one of the primary influences in the performance of precious metals.
The conflict could become particularly acute in Canada where one of the nation's major newspapers, the "Globe and Mail", just carried an article including a quote from Karla Thorpe, director of human resources at the Conference Board of Canada which noted, "...We expect 2014 to be a challenging environment for collective bargaining." The paper also quotes another union leader, Jerry Dias, who declared, "...Workers were a part of the solution when times were tough. Now that things are reversed, they expect a return on their investment in wage increases."
America also appears to be moving in the same direction, particularly in view of President Obama's declaration in his recent State of the Union Address that, "...too many Americans are working more than ever just to get by...Our job is to reverse those trends." Together with his prior comments regarding minimum wage increases, it appears likely that political pressure for at least the next three years will be in the direction of higher wage settlements where the American government is concerned.
In our opinion, the trend toward a change in the fundamental background regarding upward pressure on precious metals prices appears to be continuing.
As of 8:45 AM PST, financial markets in Canada and the USA are mixed with the TSX Index up by about 10 points while the Dow Industrials are off by around 25. Precious metals are trading higher with gold up by $8 to $1,275 and silver has added 13 cents to $20.13. Base metals are trading close to unchanged on balance while mining share indexes are up by a strong 3%.
In other markets, the US Dollar Index is down by 8 basis points to 80.68; Crude Oil has now moved above the $100 mark at $100.23 while the TYX Index of rates on US Treasury 30-year bonds is virtually unchanged at 3.664%.
All quotes US$ unless otherwise indicated.
Next Melman Minute scheduled for Wednesday, February 12, 2014