A Melman Minute — January 2, 2009

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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."

ANNUAL FORECAST - 2009

As promised, this morning's Melman Minute will be devoted to an attempt to look into the future and offer a prognostication about price movements as they affect our world of precious and base metals and their associated junior mining exploration and development companies.

Last year's forecast, originally published in "ICMJ's Prospecting and Mining Journal", had truly mixed results. We were very close when we predicted yearly highs in platinum of $2,000 (it peaked near $2,300) and silver at $25.00 (it peaked near $21.00), but we were off considerably on gold where we forecast $1,500, but the highest level attained was 'only' $1,030. We were also off on our timing, anticipating strong year-end rallies, but the peaks mentioned all came early in the year. (All figures US$ unless otherwise noted.)

However, we were dead on when we made the following general prediction:

"If it turns out Time (Magazine) is right and the consumer economy begins to lag badly, we believe the government will pull out all the stops available to keep the economy going, and that could spell monetary creation on a vast scale..."

What we did not anticipate was the crushing decline in raw materials prices, as exemplified by the chart on "Dr. Copper", so named because action in copper typically reflects the fundamental economic background. Copper plunged horrendously during the second half of last year, accompanied by nickel, zinc and lead - which in turn caused huge declines in those junior mining shares involved in the search for and production of those metals.

Looking forward, we see an intensification of the financial crisis during the coming twelve months, leading, we believe to two probable paths. If the incredible level of monetary stimulation put into place during the past nine months truly re-invigorates the American and world economies, then we would expect the fundamental industrial demand for all resource materials to rise sharply, which should directly benefit the base metals. However, we would also anticipate that if business conditions indeed flourish, the amount of newly-created monies which have already entered the system will result in rising price inflation, which should benefit the monetary precious metals as well. In fact, as noted in our December 31 MM, we believe the door will be opened to potential - and early - hyperinflation.

On the other hand, if the various economies fail to respond to such stimulative measures, we would anticipate further contraction which would adversely affect the base metals - but under those circumstances, we would look for panic buying of gold and silver as the world's monetary systems would likely come under increasing risk of outright failures.

There is an additional important factor to consider. At present, investors around the world are plowing vast sums into U.S. government debt paper in a mad dash for safety of principal. This has driven quotes on bonds higher and interest rates lower. But we believe there are two factors which mitigate against a continuation of this trend. First, the magnitude of the flow of 'stored' money into bonds simply cannot be sustained at its present level for any prolonged length of time. Second, and we believe more important, the combination of rising future inflation based on the flood of new currencies already created, along with the sheer magnitude of the U.S. Treasury's future debt offerings, will combine to force interest rates higher - not lower. Should that take place, any economic recovery could easily be cut short with new economic trauma to follow.

Putting it all together, we believe 2009 could be the year for a major move upward in both gold and silver, the two monetary precious metals. However, given the potential for an abrupt abridgement of any economic recovery, we are less optimistic for platinum, our third precious, but also importantly industrial, metal. Therefore, we offer the following predictions, both for time and price:

Gold - $2,200 per ounce - late in the year

Silver - $40.00 per ounce - late in the year

Platinum - $1,400 per ounce - about mid-year

Our outlook for the base metals is, frankly put, uncertain and therefore, we are unwilling at this time to assign specific numbers with any degree of certainty. If the stimulation already enacted indeed produces economic improvement, some price rallies for the base metals could ensue, but several factors, such as possibly rising interest rates or an abrupt cessation of government stimulation due to inflationary fears, could terminate any such improvement. We do believe that the first half of the year, however, could see significant rallies in copper, nickel, lead, aluminum and zinc - but the second half of the year 2009 appears clouded in uncertainty.

(As always, we offer the caution of "Caveat Emptor", let the buyer beware, and also that no investment decisions should be made without prior consultation with a registered investment professional.)

Financial markets on the first trading day of 2009 are showing a degree of optimism, at least during the first two hours. As of 8:30 AM PST, the Dow Industrials were ahead by 140 points and Canada's TSX was up by 130. Gold has recovered from its earlier lows and now stands just under $880 (all prices US$) while silver and platinum have posted healthy gains with silver up to $11.50 per ounce and platinum near $940. Optimism has carried over to the base metals, all of which are strongly higher including copper, up by 4 cents, nickel ahead by more than 50 and both zinc and lead are sharply higher as well.

Crude oil is trading near $44.00, close to unchanged on the session, while both the Canadian and American dollars are modestly higher. Both mining share indexes, XAU and HUI, are up by about 2%.

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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