A Melman Minute — May 7, 2014
| By | Leonard Melman |
|---|---|
| Date | May 7, 2014 |
One of the more interesting stances to take in reaction to public pronouncements is to be rationally skeptical, or in other words, to be a "contrarian." One of the more interesting sayings within contrarianism is "Nothing is confirmed until officially denied" or its opposite, "Nothing is denied until officially confirmed." An easy example of this principle was during the market collapse of 2008 when officials blatantly declared that both Bear Stearns and Lehman Brothers were soundly managed - just before they both collapsed.
Many contrarians got out of those markets. "Believers" remained in and got skinned alive.
I thought of this idea when I noticed something peculiar about action within Canadian Dollar trading. Both of Canada's major financial newspapers, the Financial Post and the Globe and Mail both carried headlines stories on Monday which carried almost identical banners. The G&M blared out, "Low-flying Loonie head: Carney protégé" while the Financial Post eerily headlined their story, "Canadian Dollar seen sliding below 80 cents by Mark Carney's protégé."
(Mark Carney is the former Governor of the Bank of Canada and now holds a pivotal role within high British financial circles.)
My contrarian interest was raised when I noticed that after the high-profile publication of these headlines which should have indicated a lower C$ directly ahead, that same currency immediately headed HIGHER in currency trading, as shown in the short-term trading chart.
By the way, it is worth pointing out that the C$ and the US Greenback frequently move in opposite directions and, since the contrarian interpretation of these comments would be bullish for the C$, then it seems reasonable to assume that interpretation would also argue for a lower US$ - and historically, that should be positive for the precious metals.
A LARGER CONTRARIAN PICTURE
Expanding on this line of thinking, I look for signs that prevailing opinion is against a position which I would like to see take place. As a gold and silver advocate, I take some real interest when public figures pan gold's future and an excellent example hit the media this morning with a Reuters article citing a prediction from the noted British publication, "Metals Focus" that, "...Gold prices have probably peaked this year and could sink to their lowest since 2010 at $1,100 an ounce as the U.S. economic recovery gathers pace..." Another reason for their pessimism regarding gold and silver is they expect tensions would ease relating to the Ukraine situation.
Regarding the near term, they added, "...weakness is likely to set in after an impressive start to the year..."
Another article which appeals to our contrarian sense and is directionally consistent with the above story deals with the sudden conversion of a long-term stock market bear into a strong market bull. Since we believe that gold and financial markets historically move in opposite directions, according to contrarian reasoning, the conversion of a financial market bear into a market bull could be interpreted as a plus for the precious metals.
The analyst in question is noted fund manager Jeremy Grantham who had built a position as one of Wall Street's most notably bearish analysts over the past few years. However, in his latest quarterly letter, just printed in Barron's Magazine, Grantham has changed his point of view and now predicts that, "...the current bull run will not end for at least a year or two and probably not before it reaches a level in excess of 2,250 on the S&P 500." (As of today, that index is trading just below the 1,880 level.)
Specifically, he predicts that the market may do some churning between now and the onset of fall, but then, "...after October 1 the market is likely to be strong, especially through April and by then or in the following 18 months up to the next (2016 Presidential) election will have rallied past 2,250, perhaps by a decent margin."
Grantham has not totally abandoned his bearish outlook, but has merely set it aside for the next two years or so. Long term he expects the onset of a powerful bear which could take the markets down by 50% or more from their peaks.
And so, by contrarian thought, we can offer the suggestion that gold and silver will indeed rally and, in addition and likewise by contrarian thought, we can offer a case for the financial markets to fall sharply.
Regrettably, at least for the moment, we must note that the precious metals are trading without much current excitement in either direction, having been confined for almost two months to relatively narrow trading ranges. As indicated by the accompanying chart, for gold that range is from roughly $1,270 on the downside to $1,330 on the upside.
We believe that as long as gold remains within that general area, we will not see any decisive general action within the junior gold shares. Given the level of many current quotes within that category, it would therefore appear likely that they will continue to have some difficulty in raising sufficient funds to proceed with near-term extensive exploration work.
READER'S CONTRIBUTION
I truly value input from our readers and one of our loyal supporters just sent me an e-mail describing his belief that government spending in general continues to expand. I not only agree with him, but I would offer some evidence that the trend is supported not just by the invention of new programs but also by the failure to do away with old and perhaps unnecessary existing ones.
Thanks to the Victoria "Times-Colonist", the major newspaper on Vancouver Island, I can offer a series of headlines during the past few weeks alone which provide us with evidence that whenever government attempts to cut back on virtually any programs, armies of advocates come out of the proverbial woodwork to demand their continuation. The collection of these headlines includes:
“Politicians fight youth jail closing”
“Camosun (college) fends off cuts to key programs”
“Single moms rally against child support clawbacks”
“Closing youth center would add to trauma”
“Cutting home economics? Now that’s out to lunch”
One of our primary concepts at "The Melman Report" is that growth of government spending is one of the primary forces behind the accumulation of government deficits and therefore leads further to growing debt and ultimately high levels of fiat money creation.
The continuing combination of expensive new programs combined with the general failure to eliminate old ones virtually assures that these trends will continue.
As of 8:45 AM PDT, financial markets in Canada and the USA are both headed higher with the TSX Index up by 40 points while the Dow Industrials Average is ahead by about 95. Precious metals are selling off today with gold now down by $13 to $1,295 and silver is off by 27 cents to $19.39 per ounce. Base metals are lower by an average of about one percent while mining share indexes are off by a similar amount on balance.
In other markets, Crude Oil had gained $1.21 to $100.73 per barrel; the US Dollar Index is up 5 basis points to 79.18 and the TYX Index of interest rates on US Treasury 30-year bonds is up by 19 basis points to 3.400%.
All quotes US Dollars unless otherwise indicated.
Next "Melman Minute" scheduled for Friday, May 9, 2014