A Melman Minute — January 7, 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."

The news on the economic fronts around the world keeps getting worse and today's headlines offer no respite from the dismal data. In fact, their are ominous hints that the overall situation could deteriorate much further before it begins to improve, for what is now becoming apparent is the awesome damage being created by the retrenchment of consumers in many nations. Here are some examples:

* - One of America's major clothing outlets, Goody Family Clothing, Inc., is going under. They had originally filed for bankruptcy protection last October in an effort to restructure terms with creditors, but all such efforts failed and the company, which owns 282 stores staffed by about 10,000 employees, is now entering into the final stages of liquidation.

* - Hard Rock Park in Myrtle Beach, South Carolina, was the western world's newest theme park. The attraction was built on the theme of rock music and over $400 million (all figures US$ unless otherwise noted) was spent building such rides as "Led Zeppelin The Ride", a corkscrew roller coaster, and "Eagles - Life in the Fast Lane", a traditional wooden coaster. Unfortunately, they opened the park just as consumers were curtailing their luxury spending and with an estimated per person cost of $65 per day, customers stayed away in droves. Total revenues could not even keep up with debt servicing, never mind covering operating expenses. About 2,000 full-time and part-time workers have now lost their jobs.

* - Conditions have become so difficult within the retailing industry that many establishments are now falling behind on their shopping center rent payments and are now petitioning shopping center management companies to lower those rents in order to stay in business. However, these requests are coming just at a time when many mall owners are facing rising vacancies - such as Goody Family Clothing noted above - and are already struggling to refinance debt coming due for payment. One example noted by the Wall Street Journal is the Loma Vista Shopping Center in Las Vegas which recently saw closures by "Steve & Barry's" and "Mervyn's", two of the center's four primary tenants. The Journal noted that, "...With rents falling and vacancies rising, analysts expect a growing number of shopping centers to default on their mortgages..." This can only add to the horrendous problems already plaguing banks, savings and loans, etc.

* - Auto sales in the USA, Canada and other nations are quite literally falling off a cliff. December sales in the USA were uniformly terrible with Chrysler down by an incredible FIFTY-TWO PERCENT while GM and Ford were off by "only" about thirty percent! GM also had its hopes for foreign income shattered by the news that their sales in China were also in decline and word out of Japan showed their domestic sales were down more than twenty percent for the month.

* - The international nature of the economic contraction was demonstrated earlier today when Moody's Investor Service just downgraded the credit outlook for the oil-rich Kingdom of Bahrain. This was the first downgrade on debt issued by oil-rich nations in the Persian Gulf region. Moody's estimated that Bahrain needs a price of $75 per barrel for petroleum in order to pay for projects already planned at last year's spending levels, and without that price or higher, Bahrain will be forced to move into deficit financing - therefore the downgrade.

* - The Congressional Budget Office of the USA just announced that it is now projecting a deficit for the current fiscal year, which began in October 2008, amounting to an astonishing, staggering, unprecedented (add your own adjectives!) figure of one trillion, two hundred billion dollars ($1,200,000,000,000) and they also added the note that this humongous figure does not take into consideration the effects of incoming President Obama's suggested one trillion in new spending plans for the coming year. Obama himself just suggested that similar deficits would be forthcoming for the next two years at least.

All of this raises the question of where this money is going to come from and, if simple artificial creation of new monetary aggregates becomes the answer, how is the American Greenback going to retain value going forward?

We are not alone in raising this question. Professor Willem Builer of the London School of Economic just posted an entry on his blog which noted that, and this is very important to our considerations of the future price for gold and silver, "...The long-held assumptions that U.S. assets - particularly government bonds - are a safe haven will soon be overturned as investors lose their patience with the world's biggest economy...this increasing disenchantment would result in an exodus of foreign cash from the U.S."

There is also a second, ultra-important question. Can it be possible that simply unleashing the hounds of artificial money creation will bring about sustainable prosperity? If it was that easy, why has the world even tolerated any economic slowdowns over the past several decades? Wouldn't it seem logical that if spreading the wealth via "printing press money" really brought about new levels of prosperity, that "cure" would have been used to overcome any past economic difficulties.

In our opinion at TMR, it isn't that easy at all. In fact, there are serious questions regarding whether such policies, in fact, do not unleash more harm than they create - and we have an excellent example to study at this time in the nation of Zimbabwe. That country has indeed resorted to the printing press and they are literally drowning in so-called money. Denominations on their bills are now running to one billion Z$ and more and huge quantities of that "money" are being shoved into the hands of Zimbabweans, but can anyone in their right mind describe Zimbabwe as a prosperous nation? Hardly!

We would offer this warning. If a minor economic player such as Zimbabwe goes under, that is one matter. But if the greatest economy on earth finds itself with a currency descending into hyperinflation, resulting in economic chaos, that is another matter entirely, and infinitely more serious.

Again, we believe that this possibility will begin to gradually edge above the horizon of public awareness, and that growing awareness will lead to huge rallies down the road for the monetary precious metals.

Markets this morning are mostly lower as of 9:30 AM PST. Financial markets in both the USA and Canada are off sharply with the Dow Industrials down by over 170 points and the TSX off by about 250. Please note on the chart that the Dow could be at an important turning point and, unless the recent strong rally resumes quickly, the market could easily turn negative. Precious and base metals have turned lower with gold off by nearly $20, silver down by 30 cents and the base metals have turned lower once again after the rally of the past few days. Platinum is moving contra trend and is now up by more than $20, but both major mining share indexes are down by about five percent. Crude oil has also turned lower after the gains of recent days, falling $3 to near $45 per barrel and the U.S. Dollar is weaker in foreign currency markets.

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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