A Melman Minute — January 19, 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."

First, we offer a note of apology for a minor error. In last Friday's Melman Minute, we noted that there were two trading days remaining during the Bush Presidency, that day and today. What we forgot was that today is "Martin Luther King Day" in America and all markets are closed - and so American trading during the Bush Era is now history (except for about three hours tomorrow AM) and we can take a quick look backward to see what took place during those eight years.

The Bush Era consisted of two bad years from early 2001 through early 2003; then five good years when the Dow reached its historic high near 14,200 in late 2007, followed by a horrendous 2008 which saw the steepest one year plunge since the Great Depression. Our great question relates to how much damage was inflicted on the entire economic structure by the expansionist monetary policies of first Greenspan and later Bernanke which led to the recovery during those five years of presumed 'prosperity'. If last year's markets are to be believed, the damage was severe.

That is history and past, while the future lies ahead of us, and that is where our attention is riveted, as it appears to be truly fraught with dangers, and it will be Obama's task to somehow find the means to restore stability and prosperity to America's markets without plunging America and perhaps the world into the abysses of either hyperinflationary chaos or deep deflationary depression. We will be watching for early clues.

In the meantime, the flood of negative news, and not all of it economic, keeps pouring forth. As an example, the Wall Street Journal recently carried an article authored by Joel Kurtzman which was headlined, "Mexico's Instability is a Real Problem." The article pulls no punches and, in fact, leads off with this ominous fact, "...And, most alarming of all, a new Pentagon study concludes that Mexico is at risk of becoming a failed state. Defense planners liken the situation to that of Pakistan, where wholesale collapse of civil government is possible.

Mexico's situation is indeed dire. Huge drug wars are killing thousands and the law enforcement community, such as it exists, appears to be doing little to stop the carnage. Money sent into Mexico from their nationals working in America is declining as job opportunities north of the border dwindle. Petroleum revenues into the national treasury are suffering from a double dose of trouble as the volume of crude oil produced is in steady decline and the price per barrel revenue is also in decline. And, as the economy encounters severe trouble, the social structure of the country is also weakening.

We cannot help but note that many of the most promising mining exploration plays are located inside Mexico and mining share investors should take the overall situation of that nation into consideration.

Unfortunately, the situation in the European Economic Community nations is also growing weaker. An in-depth study conducted by the UK Telegraph listed a litany of troubled nations in Europe and we mention only a few of the highlights they discussed.

The worst riots since the fall of Communism have spread through the Balkan and Baltic states.

Bond markets are under dire threat as:

S&P has cut their rating on Greek debt to 'near junk'.

Spanish, Portuguese and Irish bonds are on negative watch.

Dublin has nationalized the Anglo Irish Bank with 73 billion Euros of liabilities.

Greece's social fabric is unraveling.

Many European nations are already in depression or soon will be.

We have also learned that Spain is in particularly bad shape with unemployment now near 14% and expected to quickly rise to16%. Some analysts have even predicted an awesome twenty-five percent unemployment within just a few years.

And there is more. In a WSJ article out of New Delhi this morning we learn that, "...The Indian government plans to spend heavily through the next fiscal year to stimulate growth in a decelerating economy even at the cost of a widening fiscal deficit. Like many other nations, the Reserve Bank of India has been forcing interest rates lower, dropping them by 3.5% in just three months, while they are also reducing the fiscal standards for their domestic banking industry.

For those looking toward India and China to be the engines of genuine prosperity in the coming months and years, and thereby helping to lift the rest of the world out of their economic and productive lethargy, this kind of news is most unwelcome indeed.

And so, Obama takes over in America tomorrow, faced with immense challenges. His administration's actions in the coming months and years could have a critical impact on all of us, Americans or otherwise, given the central role of America on the world's economic and financial realms. Unquestionably, we also believe his actions and policies will also have a direct and significant impact on our world of metals mining and mining shares.

With the American markets closed, there are few significant moves taking place today in the financial or commodity segments. Precious metals are slightly lower; base metals are modestly higher on balance; crude oil is once again down to near US34 per barrel; and currency markets are particularly quiet. Most Asian financial markets were slightly higher last night, but European markets were down near one percent on average.

Everywhere, traders, speculators and market observers and analysts appeared to be holding their collective breaths.

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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