A Melman Minute — January 16, 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 George W. ("Dubya") Bush era is almost over. In terms of securities markets, only two days remain; today and Monday. For the next four years, perhaps eight, the Democratic Party Administration of Barak Obama and his cadre of supporters, chief among them being Hillary Clinton (Secretary of State), Rep. Barney Frank (Chairman House Finance Committee), Senator Harry Reid (Sen. majority leader) and Nancy Pelosi (Speaker of the House). Obama not only has fierce advocates in these positions of power, but will also have a House of Representatives and a Senate dominated by his own party. In other words, his power will be almost unstoppable.

Our major concern is in which direction he will use that influence. Will it be toward free markets and a sound currency, or will it be toward more government domination of the marketplace, perhaps even toward outright government ownership of growing portions of the financial and industrial structures of America, and toward even greater creation of fiat, unbacked, paper currencies? Based on the past actions and words of all the 'players' noted above, most particularly Obama himself who has been rated as the most "Liberal" Senator in America, we suggest strongly that the answer will be continual movement toward the political left, that is toward ever-greater domination of society by government.

On a personal level, we do not welcome such a move. In terms of the junior mining industry, we believe there could be benefits, at least in the short term for the base metals and in the both the short and long term for the monetary precious metals.

If all the past stimulation during the latter part of Bush's term and the anticipated aggressive public works programs already planned by the incoming Obama Administration take some foothold, they may indeed spark at least a short-term resurgence in the economy, and that would benefit virtually all commodities, specifically including the base metals - and we note this morning that when that expectation seems to be in the ascendancy, virtually all markets rise together, with the Dow, gold and the base metals all showing strong gains at their openings this AM.

However, as we have noted before, we have serious concerns regarding the question of whether prosperity based on expansion of the money supply above improvements in productivity can be sustained. In fact, it is our opinion that ultimately, any economic improvement will quickly fan the flames of inflation, which would cause interest rates to rise sharply, which would then curtail any further improvement, leading to further government expansion of the money supply and, perhaps, to hyperinflation itself.

Events ongoing today seem to confirm these speculations. We note with particular interest a story just published by Commodity Online news service in relation to the growing demand for gold coins that quotes a gold coin dealer on the 'front lines'. "David Bernhardt of Eagle's Gold Coin Shop in Indianapolis, Indiana told TV channels that more customers have been buying $950 U.S. mint gold bullion coins in a bid to diversify their investments. Many people in Indiana are putting their money into gold rather than stocks or bonds. Data from the U.S. Mint indicated that almost 1.2 million gold coins were sold last year, nearly triple the number purchased in 2007."

Anecdotal information from other coin dealers in Canada, the USA, Europe and Asia confirms the reality that around the world, gold continues to be regarded by many as "real money" that can serve as a storehouse of value during troubling times. (All figures in US$ unless otherwise noted.)

Speaking of troubling times, the economic calamity now steamrolling around the world would have claimed two new ultra-important casualties, were it not for government intervention. We are referring to both Bank of America and Citibank. Each corporation reported astounding losses for the final quarter of 2008 this morning. In the case of Bank of America, now the largest bank in the USA, the loss amounted $1.79 billion and for Citigroup, the comparable figure was $8.29 billion. B of A's losses were minor compared to those of its newly-acquired Merrill Lynch brokerage firm, which amounted to a staggering $15.3 billion.

Normally, losses of that magnitude would bring the survivability of such enterprises into question, but these are not normal times. The U.S. government immediately stepped in by announcing a $20 billion infusion of funds into B of A and also stood ready to guarantee up to $118 billion of additional losses. The government had already put into place plans to guarantee up to $300+ billion of Citigroup losses.

And so we have the pattern of a United States government increasing its level of control of major financial institutions by accepting stock in those companies in return for providing unlimited credit - which, by the way, it cannot pay for in any other way but to increase deficits which have already soared to unprecedented levels. On such foundations is the American economy built!

As if that set of circumstances was not enough to contend with, the incoming administration will also face that fact that for the first time since the Great Depression, consumer and producer prices in America are contracting steadily, an ominous situation indeed when it must be considered that government revenues gleaned from contracting prices will also contract, a frightening prospect when government expenditures in every direction are soaring spectacularly. The U.S. Labor Department just reported that Consumer Prices fell in December for the fifth consecutive month and virtually offset any price gains which took place during the first seven months of 2008, leaving America with a net rate of consumer inflation for all of 2008 of 0.1% - the lowest such figure in more than one-half century.

One side-note. As we have reported, California is staring financial calamity right in the eye, and they are undoubtedly counting on the federal government to help them avoid the consequences of an anticipated yearly deficit of $40 billion, but how are the feds to take on the burdens of rescuing California and other states when their own revenues are contracting?

Markets this morning shrugged off such concerns, instead focusing on the B of A bailout to open higher with the Dow Industrials ahead by 135 points early in the day. However, by 9:00 AM some selling had set in and the Dow was down about 40 while in Canada, the TSX is now down about 50 points after having been ahead by over 170. Gold is up by a sharp $17 to the $835 level, silver has gained almost 60 cents and platinum is up by $17.00. All base metals are stronger so far today, but Crude oil has slipped to almost match its lowest levels in many years, selling for just above $34 per barrel.

While gold's rally this morning is impressive, the yellow metals still remains in a short-term downtrend and it will take a break above resistance in the $860-870 zone to change that trend.

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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