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.
At the close of Wednesday's "Melman Minute" I asked whether the (precious metals) markets could deliver a Valentine's Day present. Well, they have, as gold and silver have opened sharply higher this morning with gold reaching above $1,320 and silver putting on a particularly robust performance, rising by a full four percent in early trading to the $21.20 area.
From a 'technical' point of view, the situation is encouraging as both charts have clearly broken above short term resistance. However, I would be remiss if I did not point out a potential bearish hazard which could lie ahead.
Gold's gains during 2014 have now reached $140 since the late December lows and the chart has successfully exceeded several areas of resistance. However, one question does loom on the horizon.
As I have written several times in this space, gold's long-term chart could be in the process of forming a major base potentially capable of supporting a historic rally in the form of a "double bottom" formation spread across one-half year with 'anchors' at $1,175 in late June and $1,180 in late December. However, there is a danger that this latest rally still might be nothing more than a
respite within an ongoing bear move.
The true test, I believe, will be whether the price of gold can exceed the intermediate high near $1,440 which was the peak of the rally following the June low - without falling below the double bottom from $1,175 - $1,180. If the yellow metal can rise strongly above that level, then I would offer the opinion that the "double bottom" pattern had been confirmed.
Just for the record, in the second half of 1974, a formation remarkably similar to that of gold's current performance was formed in the chart of the Dow Jones Industrial Average. The upside breakout from that formation led to the greatest securities bull market in history, lasting 25 years until the end of 1999 and one which saw the Dow rise from under 600 to over 12,000 - a gain of about 2,000 percent.
Silver's chart is now showing strong similarities to that of gold with the white metal breaking out to a new high well above previous resistance and silver's chart also has a clear upside target, in its case a price of about $25.25 per ounce.
THIS "RECOVERY" MIGHT NOT BE ROBUST AT ALL
America's economy began to show some significant weaknesses according to data released during the past month. January's jobs report showed only 113,000 new jobs, far below analysts' expectations of about 200,000 and, combined with an even more dismal December report, raises grave questions regarding the strength of this recovery. Personal Income figures for 2013 came in showing a gain of only 0.7% for the year, the weakest performance since 2009. Pending Home Sales for December tumbled by a huge 8.7% from the previous month and Durable Goods Orders for December fell by a sharp 4.3%. Also, the Purchasing Managers' Index of economic expectation dropped during January to a figure of 51.3, a sharp decline from December's reading of 57.3.
America is hardly alone in its sub-par data. Considerable questions regarding the future performance of China's economy have been raised. Europe's unemployment figures remain close to numbers normally associated with Depressions. Japan has NOT seen a major improvement in its economic performance despite opening their monetary spigots. It is also worth noting that currency crises combined with weak economic performance are now plaguing many emerging nations.
And now, most recently, several articles are raising questions regarding the Canadian economy.
As noted on Wednesday, one of Canada's most important resource companies, Cleveland Natural Resources, is planning a course of action which appears to contradict any concept of looming economic strength. As noted by the Financial Post newspaper, they plan to, "...slash capital spending, forgo a planned expansion at a key Canadian mine and shut another mine in Canada, cutting about 500 jobs."
Specifically, they plan to suspend any expansion plans at their Bloom Lake iron mine in Quebec and shut down their Wabush Mine (also iron) in Newfoundland and Labrador, idling 500 miners and other associated job-holders. This stoppage comes on top of closing their Wabush Pointe Noire pellet plant in Quebec last year.
The company's actions seem similar to other indications of slack demand within the base metals as the prices for copper, zinc, lead, nickel and aluminum all have been struggling just to stay relatively constant - behavior that would appear to be reflective of a stagnant international economy, not one enjoying the kind of impressive growth which the political establishment seems determined to present.
Other indications of a slowing Canadian performance include substantially negative job figures during December and a just-released report showing Canadian factory sales had dropped by a significant 0.9% during December from November's levels.
"PUSHING ON A STRING"
One of the phrases used quite commonly during the golden bull markets of 1969-74 and 1976-80
was pushing on a string", with the expression meant do explain that the money-creation authorities could not generate any real economic strength just from currency creation and other forms of stimulation. Well, given the information noted above, that phrase would appear to be accurate in the present time frame - and if it is, at "The Melman Report", we believe that the resultant futility on the part of the world's money managers may result in the greatest precious metals bull market run in history. Regrettably, under such circumstances, those market moves - if they indeed take place - could also reflect a time of social and general economic instability.
Here is why we take this position.
I believe that most government and international agency economic leaders were educated and trained to adopt a general Keynesian view of economic theory, namely that it is government's responsibility to take aggressive actions to avoid having economic downturns escalate into genuine Depressions. As such, it seems logical that if a given level of stimulation fails to produce robust growth, the response of those leaders would be additional increments of stimulation, potentially accelerating into a vicious cycle until the rate of currency creation and debt acquisition came to be regarded as ultimately destructive.
Since gold and silver are the antithesis of fiat currencies, then it seems reasonable to believe that the ultimate result would be a major increase in the quotes of those metals.
That is why I am paying particular attention to the various chart patterns now being formed by the precious metals in order to seek clues regarding the validity of the entire concept.
As of 8:30 AM PST, financial markets in the USA and Canada are rallying strongly with the Dow Industrials and the Canadian TSX Index each ahead by about 60 points. Precious metals are holding on their early gains with present quotes near $1,318 and $21.27 per ounce respectively. Base metals are moderately higher on balance while mining share indexes have gained around 3% this morning.
In other markets, the US Dollar Index is down 15 basis points to 80.23; Crude Oil has decline by 49 cents to $99.94 per barrel and the TYX Index of rates on US Treasury 30-year bonds has gained 19 basis points to 3.705%.
All quotes US$ unless otherwise noted.