A Melman Minute — November 5, 2008

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NOTE: In order to complete Mr. Melman's forthcoming book on the essential fundamentals of gold and silver, new "Melman Minutes" will be posted only three times per week, each Monday, Wednesday and Friday until about mid-January 2009. The working title of the book will be 'Eight Pillars of Gold."

The voters have spoken and, as a result, the USA will have the following political leadership:

President - Barak Obama

Senate - Democratic with a majority of about 15

House - Democratic with a majority of about 70-80

It has been many years since one party has so dominated the law-making apparatus of the world's most dominant economic and military nation. Those on the victorious side have been absolutely euphoric in their joy. Those on the losing side undoubtedly are somewhat embittered.

To those caught up in that euphoria, they had better open their eyes quickly as the world is filled with a staggering array of problems and the only solutions offered to date have been agreeable platitudes, but never hard plans which have a reasonable expectation of success. Those are what will be needed.

Among the problems facing the new administration are:

* - Rising unemployment which has grown from a rate of barely 4.5% two years ago to over 6.7% at present and appears to be headed relentlessly higher.

* - Contraction of numerous industries; most particularly the enormously important automobile manufacturing segment.

* - Relentless deterioration in the housing markets where only the massive desire to unload foreclosed or threatened homes has kept sales levels up, but where new construction and new housing permits continue to shrink - along with the valuation of already-existing homes.

* - Seemingly insoluble foreign problems such as the rise of radicalism in Pakistan; threatened nuclear expansion in Iraq; political fragmentation in Israel; war in Iraq and new eruptions of violence and instability in Africa in such nations as Somalia, Nigeria, the Democratic Republic of Congo and steady deterioration of the infrastructure in industrialized South Africa.

* - Relentless worsening of America's governmental financial structure including annual budget deficits now approaching one trillion dollars per year, an increase in the national debt of over eight hundred billion dollars in the past two months alone; and Balance of Trade deficits in the neighborhood of seven hundred billions per year - all of which are threatening to ignite the fires of hyperinflation down the road.

* - The future impact - already calculated to be in the tens of trillions of dollars - of millions of "Baby Boomers" now in their late-fifties to mid-sixties who, with absolute certainty - will be inundating the roster of federal social security retirement recipients as well as being added to the already-swollen numbers of those covered by America's largest social/welfare program, Medicare coverage.

And where are the answers to come from? America is arguably in the worst financial situation in its entire history. It is swollen with debt at all levels, savings rates have turned negative, unemployment is rising rapidly, manufacturing is contracting and interest rates are already down to virtually "zero", leaving no room at all to manipulate and resolve.

A story in yesterday's Wall Street Journal highlighted this sorry state of affairs. The article pointed out that 95% of U.S. banks were tightening lending standards, rather than loosening them, indicating credit will be harder to obtain for cash-starved industries. They also noted the severe contraction in manufacturing, citing the Institute for Supply Management's Index falling to quarter century lows. And, the journal reported, expectations for this Friday's jobs report indicate further job losses for October totaling anywhere from 150,000 to 200,000.

The retail segment in America continues to decline. Not only have long term, highly-regarded firms such as J. C. Penney seen their fortunes deteriorate remarkably over the past two years, but new firms continue to report troubles, such as Circuit City which just announced the closing of 155 stores and Reuters just reported that analyst Colin McGranahan of brokerage house Sanford C. Bernstein was quoted as stating, "...At this point, we believe that a bankruptcy filing for Circuit City (CC) is largely unavoidable. The share price of CC has collapsed from over thirty dollars to 30 CENTS, further depleting the assets of their shareholders (see chart).

And, of course, we are now reading of immense troubles in the automobile industry with Ford, General Motors and Chrysler all facing potential calamity.

It is an imposing list of problems for the incoming administration to handle. It will be most interesting indeed to follow their progress (or lack of same) during the coming months and years.

Markets this morning have been inconsistent, to put it mildly. The Dow Industrials are down over 160 points as of 8:40 AM PST, indicating some degree of pessimism, but gold is also down sharply by about (all quotes US$) $20, which would normally indicate economic optimism. Other metals are mixed with silver, platinum and nickel higher this morning, but copper, lead and zinc are lower. Crude oil is trading quietly near $69 and currency markets are close to unchanged this AM.

DISCLAIMER

The information presented above is based on data which we believe to be from reliable sources, but the accuracy of which cannot be guaranteed. Any opinions or predictions contained herein are those of the editor and are likewise offered also for information purposes only.

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