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.
Although we frequently refer to several influences on the price of the precious metals, I believe that the strongest influence of all is the presumed rate of future INFLATION since the purchasing power of fiat currencies - the alternative to gold and silver - diminishes as the rate of inflation increases.
In terms of impact on price inflation, one of the most important groups of commodity items is the petroleum complex and it is with growing interest that we note what appears to be a build-up of long term pressure to the upside. As the five-year chart illustrates, Crude Oil has now breached the $102 per barrel level, recently exceeded a previous top and the pattern of successively higher bottoms stretching back several years remains intact.
It is not just Crude Oil, but Brent Oil, Natural Gas, Heating Oil and Unleaded Gasoline that have also showed steady increases in prices over the past few weeks. All of this is taking place during a time of increasing production, leaving us with the question of exactly what is going on. However, as long term readers know, our preference is to watch what the markets are actually doing - and market actions for some time are pointing toward higher prices for the petroleum group. We consider that yet another long term plus for the precious metals.
UKRAINE, VENEZUELA and THAILAND
The international news media has suddenly been swamped with stories of apparently important unrest in three separate nations at one and the same time, including the Ukraine, Venezuela and Thailand which makes us wonder if some form of primal reaction against the power of political establishments might be taking place as that common thread appears to be present in each instance.
The Ukraine violence appears to be the most dangerous at the moment as twenty-five people are dead, over 200 injured and there are reports of major property damage within the capital city of Kiev. Government police have used live grenades against crowds and a major trade union building which had been home base for many of the protestors has burnt to the ground. More violence is expected.
The issue at hand is crowd anger against the government because of a perception of pro-Russian bias among the country's political leadership which has resulted in the rioters demanding the ouster of current Ukrainian President Victor Yanukovych.
Venezuela has seen growing unrest of late as the economy seems to be crumbling around the feet of Socialist President Nicolas Maduro, Hugo Chavez' hand-picked successor. Opposition leader Leopoldo Lopez has led angry demonstrations against the government which have led to several deaths. Demonstrators are angry at the current situation within Venezuela which Mr. Lopez summarized as, "...a moribund economy, rampant crime and food scarcity." During the past 24 hours, Lopez turned himself in to government authorities as a gesture to try and establish peace, but he also declared he was presenting himself, "...to an unjust system, a corrupt justice system."
Thailand has been emerging as one of Southeast Asia's most advanced economic nations, but the social structure there appears to be teetering as well as new rioting has broken out between government and antigovernment forces leading to four deaths and fears that Thailand could plunge into a period of destabilization. Government leaders expressed fears that if the rioting becomes wide-spread, it could discourage several companies from going forward with planned investments in the country's economy.
In each case, there is obvious disillusionment on the part of many with present leadership in all three countries. In our opinion, that type of unrest could easily work to raise levels of uncertainty - and put upward pressure on the prices of the precious metals.
NEW NEGATIVE ECONOMIC DATA
One of the broad themes at The Melman Report is that belief in the power and sustainability of the international economic recovery from the "Great Recession" is neither as powerful nor as durable as proponents have suggested and three new articles appear to support our contention.
First, the U.K. has just reported an unexpected increase in that nation's unemployment rate to 7.2% from the previous reading of 7.1%. Observers predicted calls would be issued to retain or even expand present stimulative measures.
In addition to previous economic reports showing recent American economic weakness, the US Department of Commerce just reported that U.S. Housing Starts recorded their biggest drop in three years in January. While some attribute bad weather as a primary cause, it was also noted that Building Permits, an indicator of future housing starts, had declines for three straight months as well.
The Federal Bank of New York just released data showing that while American consumers are becoming more active, much of that activity is based on increasing levels of personal debt as the Household Debt figure just rose by $241 billion in the Fourth Quarter 2013.
Taken together with other recent economic releases, we interpret these numbers as suggesting that the current recovery is less robust than generally supposed and that it is increasingly vulnerable to an early reversal. If this is true, it would appear most likely that the Fed and the political establishment will continue their low-interest, strong stimulation stance, including ongoing Quantitative Easing programs which involve fiat money creation.
That leads us to the article directly below.
A CLEARLY EVIDENT TRUTH
I should preface that title by noting that what I am referring to is a 'clearly evident truth' from my personal point of view. In any case, what the title refers to is an article by a McGill University associate professor of economics published in a major newspaper (the Toronto Globe & Mail) which says plainly that rampant money creation feeds inflation. Such statements are rare indeed.
The associate professor involved is Christopher Ragan and his article is entitled "Money and Inflation: 101 Class in Session." The part that caught my eye was this definitive statement:
"But money is a funny thing. Printing it faster does not ultimately create real wealth, and one of the most important lessons in macroeconomics - and it is a difficult one to learn in detail - is that the short-run influence that central banks have on output and employment disappears over time, to be replaced by an influence mostly on the rate of inflation. Over periods of many years, the single most important cause of inflation is the rate of money growth and this comes mostly from monetary policy."
He then documents exactly how countries with, "...high long term rates of money growth are also countries with high long-term rates of inflation."
As of 8:30 AM PST, financial markets in Canada and the USA are both trading higher with the Dow Industrials ahead by about 45 points while Canada's TSX Index has gained 65. Precious metals are retreating slightly with gold off by about $5 to $1,318 and silver is 15 cents lower to $21.82 per ounce. Base metals are trading close to unchanged on balance while mining share indexes are now about one percent lower.
In other markets, the US Dollar Index is up 2 basis points to 80.06; Crude Oil continues its recent rally and is up by 49 cents to $102.59 per barrel and the TYX Index of rates on US Treasury 30-year bonds is down by 7 basis points to 3.673%.
All quotes US$ unless otherwise indicated.
Next Melman Minute scheduled for Friday, February 21, 2014