A Melman Minute
| By | Leonard Melman |
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NOTE: Leonard is currently at the PDAC convention, the world's largest annual mining gathering, scheduled for March 2-5 in Toronto. We certainly invite all our readers residing in the Greater Toronto Area (GTA) to attend.
It is often amazing how history can repeat itself. One of the primary factors in the final surge of the great 1976-80 metals bull market came about as a result of possible direct conflict between the Soviet Union and the USA over the Soviet military incursion into Afghanistan. This morning, bullion is rising sharply as a result of the Russian military incursion into the Ukraine – an action which has brought about the threats of international sanctions lead by the USA.
The effect on securities markets has been dramatic and swift as illustrated by trading action this morning in one of Russia's leading coal companies – trading which has caused the loss of almost one-quarter of the company's value in today's trading alone.
Another immediate market reaction drove Russian interest rates higher as their most important base rate shot up from 5.5% to 7% in one shot as a result of government action taken to support the Russian Ruble which has been falling sharply in international currency markets.
RUSSIA AND THE UKRAINE
It is difficult at this time to see how the situation in the Ukraine can resolve itself peacefully.
Approximately one week ago, the peace was broken by rioting which broke out in protest against the actions by Ukraine's Prime Minister to reject close working ties with the West in favour of increasing cooperation with Russia. During this fierce rioting, property destruction reached troubling levels and the death count steadily rose as the Ukraine government took increasingly severe measures to quell the disturbances.
Russia then reacted in an openly aggressive manner over this past weekend in order to supposedly protect their interests. As Canada's “National Post” newspaper put things: `…Russian troops moved on Sunday to tighten their grip on Crimea, the Ukraine territory that has historic links to Russia and is home to its Black Sea fleet.”
Russia, in turn, explained their actions. In a conversation with Germany’s Chancellor Angela Merkel, Prime Minister Putin was reported to have claimed, “…Russian citizens and Russian-speakers in Ukraine faced an unflagging threat from ultra-nationalists.”
In response to the Russian invasion, Ukraine’s temporary prime minister, Arseniy Yatsenyuk put the Ukraine armed forces on ‘red alert’ but few serious observers believe the Ukraine has the weaponry or manpower to blunt any serious Russian military actions. This view was borne out by Yatsenuk’s call for the West to counter Russian actions.
Financial markets in general reacted negatively to the heightened levels of unrest with the Dow Industrials Average, as an example, dropping by nearly 200 points during the first two hours of trading today.
GOLD’S REACTION
As might be expected, the gold market reacted to this type of news by staging a strong rally and as this is written early in the trading day, gold has already surged by about $30 to rise above the $1,350 mark for the first time in several months and, as illustrated by gold’s chart, the yellow metal is now advancing toward the important intermediate high set last fall near $1,430.
Gold’s advance since the beginning of 2014 has been consistently strong and today’s sharp advance puts gold within just a few dollars of breaking above the next serious resistance near the preceding peak of about $1,360 and brings the year-to-date gain to above $170, a figure that is getting increasingly difficult to ignore.
Unquestionably, the Russia vs. Ukraine situation is front and center in the eyes of many of the approximately 30,000 attendees at this year’s giant PDAC Convention in Toronto and, despite the potential social consequences for millions of people, the convention is very much alive to the potential for another significant move upward in the precious metals.
By the way, it is not only the Russian conflict that has been instrumental in the precious metals rally. Forces seem to be gathering along the “inflationary’” front as well. Interest rates, which constitute one of the primary costs of production, appear to be on the rise and the battle for increasing the “minimum wage” is growing in political intensity as well.
We note that President Obama has made an increase in wage rates one of the primary planks in his recent political speeches and the trend does indeed appear to be gathering strength. Not only is support for raising America’s national legislated minimum wage rate from just above $7 per hour to over $10 per hour, but several state government has already taken action with rates increases already approved or schedule for near-term increases in Connecticut, Rhode Island, California, Washington, Massachusetts and Vermont.
In our opinion, these wage increases – if fully implemented – cannot help but increase the costs of production and distribution throughout the economy.
We would also add that Democrats and Republicans seem to be lining up on opposite sides of this issue with Democrats “pro” and Republicans “con”. Minimum wage rates are expected to be an important issue in the 2014 Congressional elections slated for this coming November.
PDAC 2014
As always, the annual convention of the “Prospectors and Developers Association of Canada” (PDAC) remains one of the major highlights of the mining year, drawing participants and widespread media attention from mining communities and activists around the world. Once again this year, there are approximately 30,000 attendees and representatives from a multitude of mining nations including Canada, USA, Mexico, Chile, Peru, China, Australia and a host of others.
I had the opportunity to address the convention’s “Financial Conference” on Sunday and my message was one of growing personal optimism regarding the metals’ potential future. While noting the potential for a technical disappointment if gold falls below the “double bottom” near $1,175-80 which we have noted several times of late, I also pointed out that in my view, the fundamental background was becoming more positive in terms of inflation, destabilizing interest rate increases and, timely enough, increasing levels of international tensions.
By one of those unlikely coincidences, the Russian responded on cue to quickly fulfil that last prediction.
There was one other important point I stressed. Given the total circumstances of the precious metals themselves and their associated shares, I believe that we may be living through a time of historic opportunity in metals investments for two reasons.
First, according to recent reports, the ratio of the total dollars invested in ‘conventional’ investments such as industrial and banking shares, government and corporate bonds, real estate, etc., when compared to the total investment in all forms of precious metals investments is on the order of greater than 99% compared to less than one percent. If current trends continue – as noted above in inflation, interest rates and international tensions – it appears to me to be quite possible that a move of perhaps two to three percent away from more normal investments into the realm of precious metals could take place and, given the leverage inherent in metals markets to sharp moves, the potential increase in metals and share values could be substantial.
In addition, many mining shares have been beaten down during the past 30 months – to put things mildly – and it would appear that any outsize buying surge could move such quotes significantly to the upside.
Of course, I also pointed out the risk that if the precious metals failed to rally and fell below previous lows near $1,175-80, then quotes could drop swiftly and therefore only high risk capital should be utilized.
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As of 8:30 AM PST (11:30 AM EST), financial markets in Canada and the USA are diverging. America’s Dow Industrials remain down by about 190-200 points due to factors noted above but Canada’s TSX Index has held onto small gains thanks to positive actions in both the metals and the petroleum complex. Gold continues to advance and is currently ahead by about $35 today to near $1,355 per ounce while silver has gained 31 cents to near $21.60. Base metals are off slightly on balance while mining share indexes have advanced by about three percent.
In other markets, the US Dollar Index has advanced by 18 basis points to 79.90; Crude Oil is sharply higher on rising threats to production and distribution, gaining by $2.29 to $104.88 per barrel and the TYX Index of rates on US Treasury 30-year bonds has fallen by 30 basis points to 3.562% with the chart now appearing to be on the verge of a move to the downside in such rates.
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All quotes US$ unless otherwise indicated.
Our “Melman Minute” schedule has been revised slightly to tomorrow, March 4 and Friday, March 7 in order to accommodate a slightly altered travel and speaking schedule.
However, given the nature of markets in a period of sharp flux as we are now experiencing, we plan to publish special bulletins if conditions suggest.
PLEASE NOTE : The schedule will be maintained to the best of our ability. eMail notifications will also be suspended until our regular schedule resumes. Please check our website for updates.
I am truly looking forward to this year's PDAC for reasons aside from having the opportunity to present my personal views to the convention on Sunday morning at 9:30 AM. Our world of precious metals mining is at an important crux and it will be most interesting to learn of various points of view from my valued colleagues, international mining leaders and from mining industry experts.
An attendance in the range of 30,000 people is expected and PDAC 2014 should provide a grand time for all. I can only urge that anyone who is able to attend should do so. The mining company exhibit areas and Financial Conference presentations are free of charge to the general public.