A Melman Minute — January 14, 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."

As long-time readers know, one of our primary stances is to be bullish long-term for the monetary precious metals, gold and silver. The basis for this opinion is that economic contraction in America and other nations will become so severe that monetary authorities will presume that they have little choice but to stimulate their way out of the growing crisis via massive monetary creation, huge budgetary deficits and enormous increases in government debt levels. All of those factors combined could lead to a growing fear of future hyperinflation and that fear, we believe, should result in growing numbers of investors taking positions in gold and silver.

Reports over the past few days appear to confirm the growing nature of the crisis, and none appear to your editor to have more profoundly negative implications than the just-released data regarding the United States budgetary deficit. According to figures published yesterday, the deficit for the first three fiscal months of 2009 has reached previously unimaginable levels! The total deficit accumulated in just October, November and December of 2008 has amounted to a horrendous $485.2 billion - exceeding the record deficit amount for any previous YEAR! Despite already-acknowledged estimates that this fiscal year's deficit could exceed one trillion dollars, this new figure suggests to us that two trillion or more could be more accurate. (All figures US Dollars unless otherwise noted.)

What is even more incredible is the reality that the worst of the budgetary numbers may lie ahead, not behind us. The new figures result from the spending of only a portion of the Troubled Asset Relief Program as there remains about $400 billion from that program still to be expended. Then, add into the mix the $800 billion - or so - suggested early expenditures from the incoming Obama Administration's programs for infrastructure improvement and job creation. In addition, we must next include the reality that the revenue side of the American governmental equation is likely to be crushed by diminishing personal and corporate tax revenues, while the expenditure side for programs such as unemployment insurance, welfare, social security and Medicare are soaring ever higher.

If the deficits indeed reach levels like two trillion dollars per year, we must question just how is the U.S. government supposed to float sufficient real debt to finance such staggering sums, particularly when it is offering investors less than three percent return for even the longest maturities? This query is also compounded when it must be realized that virtually every other important nation on earth will be coming to the same international debt markets with their own huge offerings, and counting on foreign treasuries to purchase US debt may be a thing of the past as formerly cash-rich nations such as China, Russia, Saudi Arabia, Dubai and Russia have seen their revenue streams from oil and export manufacturing contract sharply.

What a mess - and severe problems are hardly limited to the government side of things.

One of the industries which was supposed to have benefited most directly from all this government stimulus was the world of major banks, but one could hardly see a collection of more negative news than what we have been receiving of late. Bank of America's stock has descended to the lowest level in decades. There is renewed talk about breaking up the world's largest bank, Citibank, a part of Citigroup Corp. In Germany, Deutsche Bank, that nation's largest, just reported a loss of almost four billion Euros (approx. C$ six billion or US$ five billion) for the last quarter alone.

In America, retail sales for December fell sharply by almost three percent, an almost unprecedented development during the heart of the Christmas selling season, and, reflecting the deteriorating retail and shopping mall environment, major retailer Gottschalk's Inc. just filed for bankruptcy protection. Company CEO Jim Famalette was quoted by AP as noting, "...Persistent challenges in the economy and recent reductions to our borrowing capacity as a result of tightening credit markets have left us with no other recourse."

The effect on Gottschalk's stockholders has been devastating, as can be clearly seen on their price chart, which has fallen from over $16 to eleven cents.

The conditions Famalette mentioned, namely those regarding the economy and corporate borrowing, are simply not abating, and therefore, at TMR, we anticipate many other such bankruptcy filings in coming weeks and months - all of which will serve to exacerbate the American budgetary situation noted earlier as newly-dismissed employees stop paying income taxes and go on unemployment insurance; now defunct companies stop paying corporate income taxes; and shopping center operators also move into loss positions where they will become government wards, rather than tax producers.

Canadian vulnerability to such conditions was highlighted by the fact that Nortel Networks Corp., once Canada's largest company, has also just filed for bankruptcy protection in the U.S. and plans to file in Toronto. Declining sales, huge indebtedness and an inability to raise sufficient new capital have led to the current situation.

The drop in Nortel's stock has been astonishing; from a split-adjusted high of US$860 to a present quote of just thirty-two cents! The loss in shareholder equity capital as well as psychological damage to Nortel's legion of investors is almost incalculable.

Virtually all markets are being hurt by this avalanche of negative news this morning. As of 9:00 AM, Canada's TSX is off by about 300 points and the Dow Industrials are down by nearly 250 - and both averages are now trading at new low levels for 2009, having given back all the gains of late December through the first few days of January.

Metals are also having a difficult time with gold down by about $6, silver off twenty cents and platinum $8 lower. Both major mining share indexes have declined by about 4% and base metals are also showing weakness. Crude oil is now trading near its lows for the entire decline, now quoted just above $36, and the combination of lower metals and petroleum quotes has hit the Canadian Dollar hard, falling to just above 80 cents U.S. in today's foreign currency market trading.

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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