A Melman Minute — January 12, 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."

Some facts seem particularly significant and here and we note this morning one that is truly one for the books, an otherwise relatively unimportant note which shows just how dramatic the worldwide financial crisis has become. We have become used to reporting that such-and-such an indicator is at the worst level in perhaps five, ten, twenty or even fifty years, but that is kid's play compared to the action just taken by the Bank of England in lowering its official short-term interest rate to 1.5%. It turns out that this is the lowest official rate in the Bank of England's history, going back three hundred and fifteen years, all the way to 1694! Truly, this is 'uncharted territory' and reflects the severity of the current situation.

There are certainly many other indicators which show the depth of the crisis, along with growing widespread skepticism regarding the world's monetary authorities' ability to find a believable resolution to the spreading crisis.

We note, for example, that the situation in many countries has become so drastic that there is a renewed surge in demands for 'protectionism' in many nations. A Wall Street Journal article this morning notes that, "...A wave of protectionism is spreading around the world that could further damage struggling economies." Some of this protectionism is taking the form of increased tariffs against imported items and examples include Ecuador raising impositions on imported beef; India raising tariffs on steel; and Russia raising levies on imported cars.

Other tactics include Indonesia requiring special licenses to control importation of clothing, shoes and electronics; Mexico threatening to create new regulatory impositions on the imports of meat from the USA; and, speaking of the USA, much of the legislation being considered by the Obama team includes "buy American" provisions. (Of course, such provisions may be difficult to impose since America no longer manufactures a long list of important items.)

What many of these economic worthies seem to have forgotten is that the imposition of trade barriers in the late 1920s was a major factor in exacerbating both the depth and duration of the Great Depression, and some of the impacts would be predictable, such as a direct hit on international shipping and air cargo businesses and more unemployment as export-oriented businesses suffered. But pronounced public calls to "do something!" sometimes have more weight with politicians as opposed to rational economic analysis.

We also note an article out of California which contains the startling figure that during 2008, about 150,000 people departed the Golden State. California used to be among the most attractive destinations on earth for incoming residents, but huge taxation levies, massive budgetary deficits and strangling environmental regulations have made that state appear to be particularly unattractive to business - and the situation could get worse. According to some estimates, California may be faced with a budgetary deficit during 2009 of forty billion dollars (all figures US$) and, if many people are fleeing the state, then the pain of raising such monumental sums must be shared by fewer and fewer taxpayers.

On yet another topic, one that will hardly surprise skeptics, both General Motors and Citigroup are already holding out their corporate coffers for further government handouts. With the collapse of sales during December, GM's operating funds are already running low and the first distributions of government funds will likely accomplish nothing other than buying a little time. The same appears true of Citigroup (see chart) whose Board of Directors just informed Wall Street that their operating losses for the Fourth Quarter 2008 alone could reach $10 billion. Readers may recall that the U.S. government recently 'invested' $45 billion in that banking group, but one look at the long-term chart of Citigroup shows that investors remain singularly unimpressed.

Given the continuing torrent of bad news, many market observers are beginning to conclude that the Dow Industrial's recent rally of late December through early January was nothing but a relatively minor interruption to the ongoing bear market which began in late 2007 and has gathered strength during the past year. One look at the Dow chart over the past decade will show clearly that the recent "powerful" rally appears to be nothing more than a minor correction within an overall bearish trend, a situation eerily similar to the first important downleg of the Dow during the 1929-19322 debacle. After falling off a cliff during late 1929, during which time the Dow fell from a peak of 384 in September, 1929, to a low of just below 190, the average then rallied by a strong 48% in early 1930, only to quickly turn south once again with a vengeance, soon making new lows en route to its ultimate bottom at '40' in 1932.

As of 8:30 AM PST, markets continue to reflect fears of worsening economic conditions. Crude oil is headed down once again, trading off by more than $2.00 per barrel at just above the $38 level. Base metals are being particularly hard hit with copper down about 8 cents, nickel off a sharp 65 cents, and both zinc and lead down by about two pennies each. Precious metals are faring no better with gold down by almost $30, silver 30 cents lower and platinum off by $25 and both major mining share indexes are lower by 5-6%.

The U.S. dollar is showing some strength in currency markets while the Canadian Dollar, perhaps due to falling metals and petroleum prices, is down by almost a full cent today, trading just above 83 cents U.S. Financial markets were off in both countries with the Dow falling by about 70 points and the TSX down by over 200.

NOTE: We invite all readers to register for the upcoming Cambridge House conference to be held in Vancouver January 25-26. Your editor will be presenting a workshop entitled, "On the Road to Hyperinflation???" on the 26th and numerous other analysts will be discussing important topics directly relevant to our world of metals and mining investments. The website for FREE early registration can be found at www.cambridgehouse.ca.

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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