A Melman Minute — January 23, 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."

NOTE TO READERS: You are invited to attend the Cambridge House gathering at the Vancouver Convention Center Sunday and Monday, January 25-26. An array of presenters, including your editor, will be offering their comments on the investment world; particularly as it applies to mining and metals. Mr. Melman will be presenting a workshop entitled "On the Road to Hyperinflation???" at 11:00 AM, Monday, January 26 in Workshop 5. "The Melman Report" booth on the exhibition floor is #1208.

Free pre-registration is available at www.cambridgehouse.com. Look forward to seeing you there!

In line with the topic noted above, we cannot help but observe that something out of the ordinary is taking place in the market for U.S. 30-year bonds. While the U.S. government; via the Fed and the Treasury, have been jaw-boning interest rates down, the quote on long bonds has been falling, meaning long term interest rates are now rising. In fact, one look at the chart suggests that an important bottom has been set in place. In our opinion, these considerations are ultra-important and we believe that nothing could derail the U.S. government's recovery plans faster than a rapid rise in long-term rates. Such an event would harm the mortgage market, the car finance market, large retail purchase financing, etc. - just at the time when the government was trying to stimulate consumer activity.

We also believe that this recent action in the bonds could reflect the beginning of a belief that all the government stimulation that has taken place already, combined with the horrendous amount yet contemplated over the next months and years, could lead to the devaluation of the U.S. Dollar as foreign powers that have been financing the run-up in U.S. debt simply run out of either the willingness to continue buying U.S. government paper - or the ability to do so - or both!

In terms of ability, we note that the economies of several Asian nations have been hard-hit by the recent economic downturns, and these are nations which have been instrumental in financing American deficits during the past few years. In a story datelined out of Beijing, the Wall Street Journal notes that, "...Three of Asia's powerhouse economies - China, Japan and South Korea - are stalling as demand for their goods from the U.S. and Europe wilts, and there are few signs of a hoped-for increase in (domestic) Chinese consumption..." We also learn that China's growth rate has been virtually cut in half while both Japan and South Korea have actually entered into contraction of their GDP figures.

Financial analyst Peter Schiff address this question this morning when he wondered how long foreigners would be willing to set aside their own stimulation programs in order to keep funds available to continue purchasing U.S. debt at present levels. The question also relates to oil-rich Saudi Arabia which has seen their financial structure squeezed by the sudden and enormous drop in crude oil prices.

Schiff raises an interesting question when he notes that many American government financial staffers have grown accustomed to foreigners buying U.S. debt in order to protect their ongoing American investments and simply assume such purchases will continue. However, Schiff raises a warning when he writes, "...But just because the game has lasted thus far does not mean they will continue playing it indefinitely."

We would add this thought: This world-wide financial calamity and it has surely reached a stage where that description is no longer far-fetched, is, to use the well-known expression, "a horse of a different color." Long term rules which once held are going by the boards as we note that Britain's Bank of England just lowered their interest rates to the lowest level in more than three hundred years; Lloyd's Bank is now threatened with failure after two hundred fifty years; American historic financial institutions such as Lehman Brothers, Countrywide Financial, Merrill Lynch, Washington Mutual - and a host of others - are no longer in business; Spain's unemployment rate has reached levels not seen since the Great Depression; and debt levels in nation after nation have now reached the highest levels ever recorded.

So, just because foreign nations have not yet slowed down the rate of accumulation of U.S. debt holdings (which have grown by more than $450 billion in the past year alone), does not mean they cannot or will not do so in the future. If they do, if they fail to support the Greenback as they have done of late, then it could indeed open the doors to a major shift in the structure of international money transfers with potentially unidentifiable, but possibly dire consequences.

Perhaps because of such considerations, we are able to publish the following headline this morning at TMR:

"Gold Smashes Through to Historic Record High Prices!"

As of 9:30 PST this morning, we saw the following quotes for an ounce of gold:

Canada - C$1,118

Britain - BP654

EEC - 696 Euros (European Economic Community)

Australia - A$1,375

While the quote in U.S. dollars remains below the March 2008 high of $1,030, we can only wonder if it is just a matter of time before that record high is exceeded as well. We also cannot help but note that these quotes are indeed good news for mines, particularly in Canada and Australia, which operate within their home currencies, but receive payment according to the appreciating (for the time being, at least) U.S. Dollar.

Markets this morning have moved significantly on a number of fronts. As of 9:30 AM PST gold is up by over forty dollars and has just touched $900.00! (all quotes U.S. Dollars unless otherwise noted) This represents an important upside chart breakout, as can be seen below. Silver has just reached $12.00 per ounce and platinum is up strongly as well, now above $950. All base metals are up strongly and, not surprisingly, both major mining shares indexes, XAH and HUI, are soaring, up by eight and nine percent respectively.

Financial markets are mixed, with the Dow Industrials falling by about 135 points while Canada's TSX, buoyed up by rising mining shares, is ahead by about 100. Crude oil is trading quietly near $43 per barrel and in currency markets; the Greenback is slightly higher while the Canadian Dollar is significantly stronger.

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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