A Melman Minute — January 30, 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."

Finally, after what has seemed to be an unending losing streak, words of solid encouragement are being heard in our world of metals and mining. We are seeing numerous shares begin to advance, some of them with surprising strength. Next, as these advances take hold, it is becoming possible to raise badly needed funds with only limited share dilution and, as a result, we are hearing of successful financings with growing frequency. Lastly, we are also witnessing stabilization in the quotes of the base metals and solid price advances among the precious metals.

Our long term guidelines at TMR remain unchanged. It is our belief that the unending parade of monetary inflationary activities in America, which is threatening to turn into a virtual tidal wave of dollar creation, will result in growing visible price inflation the moment that giant economy begins to recover, if a recovery does indeed take place. We also believe that even before actual price inflation becomes visible, the financial marketplace will demand higher interest rates in order to maintain some semblance of future purchasing power, particularly for long-term bonds. Finally, as inflation begins to escalate, we expect a virtual collapse of the U.S. Dollar. We hold to the opinion that each of these events, namely monetary inflation, price inflation, rising interest rates and a collapsing dollar, would benefit the monetary precious metals in particular, with the base metals likely benefiting from any up-tick in industrial demand.

Should any recovery fail to take place, we believe the potential would then exist for a huge loss of faith among the public in the ability of government to manage America's economic society - and that loss of faith, felt as it probably would be around the world, would raise the levels of panic and fear, which we believe would likely benefit gold and silver.

So far, without question, we have seen huge increments of monetary creation and we are also hearing talk of rescues and bailouts of a scale literally unprecedented in economic history. And now, we are beginning to see something else. Perhaps brought about by fear of future visible price inflation, long term interest rates are suddenly headed HIGHER, not lower. One look at the TYX Index, which measures the interest rate on 30-year U.S. government bonds, clearly shows this recent development as those rates have gained more than one percent in just a few weeks.

Interestingly enough, as the TYX chart has begun to head higher, not lower, gold has started out on its own powerful move upward, and this morning, with spot gold reaching the $920 area, the yellow monetary metal is now trading at its highest price of the past six months. It has broken clear of the $879-900 resistance area and now; the only two significant resistance levels remaining are $950-975 and $1,000-1,030. As noted earlier, while these figures in U.S. dollars are impressive, we would remind readers once again that, in terms of other fiat, unbacked currencies, one after another, gold is now trading at the highest levels ever recorded. (All quotes US$ unless otherwise noted.)

This morning we are once again witnessing the "spin" technique of "it could have been worse" in action, with the release of the preliminary GDP figures for the Fourth Quarter 2008. According to the U.S. Commerce Department, the U.S. economy contracted at an annualized rate of 3.8% during that quarter. However, one headline after another noted that this number was "not as bad as previously expected", since many government and private economists had previously predicted a collapse rate of 5% or worse.

In fact, an economy contracting at almost four percent per year is a very serious matter. According to the Department of Labor, there are approximately 144 million Americans currently employed. At four percent contraction, that means almost six million jobs will be lost during the coming twelve months! We also note that many measures of future economic activity are getting worse, not better. These include such data as new home construction, new home permits, excess inventory build-up, consumer sentiment, length of unemployment duration, real estate inventory build-up, etc.

But the 'spinmeisters' are trying to convince us that all of that is not bad, because "it could have been worse", so we should feel better! By the way, it is our opinion that the new Obama Administration is practicing the same technique as it deliberately exaggerates how bad things could be so that if they turn out to be 'less bad' in the future, BHO and his team can claim credit for their relative 'improvement'. I'm sure that will make the millions who are likely to lose their jobs in the coming year feel so much better!

But that type of strategy has a much more serious aspect, and one which could have an effect on precious metals mining development and production. If that hoped-for relative improvement does not occur, that type of rhetoric could further advance feelings of doom and panic, which, in turn, could exaggerate any future moves in gold and silver to the upside.

We have also been seeing yet another repeating pattern during the past several days. First, we are bombarded with how government has taken long-awaited action to "solve" the economic problems, which in the most recent time period has involved the passage of yet another stimulus program ($825 billion dollars worth) as well as serious talk about the creation of a "bad bank" in which to 'dump' all the toxic debt instruments that have been clogging up the banking system. Next, the markets react with a 'whoosh', in this case reflected by the Dow Industrials soaring from a low of 7,900 to about 8,400 in just a matter of a few days. However, like so many of these spectacular but quick rallies of the past year, this latest version is also petering out quickly as that average fell sharply yesterday by 220+ points and is down a further 110 points during the first two hours of trading this morning. The Dow is once again back to barely above the 8,000 level.

Apparently, there is still a great deal of skepticism about the long-term viability of 'solutions' which are based on nothing but the artificial creation of non-value money. In our opinion, such skepticism is entirely justified.

In other markets this morning, as mentioned, gold and silver are higher, with gold touching spot $928, before retreating to about $924 as of 9:00 AM PST. Silver has also been strong, reaching as high as $12.62 and platinum is once again approaching the $1,000 level. Base metals, however, have been lackluster so far today and are showing moderate declines on balance. Both crude oil and the U.S. Dollar are a bit higher while the Canadian Dollar has declined to just under 81 cents U.S.

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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