A Melman Minute — February 3, 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."

One of the most overlooked segments of the consumer economy is the well-being of the elderly. Perhaps that might be because they are somewhat out of view or it might be due to the fact that they don't spend as much on a daily basis to satisfy consumer demands. But two things should not be overlooked. First, they do indeed consume mightily, even if their consumption is for nursing homes, medicines, walkers or a host of other items related to making their old age as comfortable as possible. Second, they can be a formidable political force.

We take notice of the retired elderly because they are being financially smashed in three specific directions. First, the value of the average stock and investment portfolio has taken an enormous beating. Second, the interest they are able to earn on stored funds is dropping like a stone. And now, third, the dividend income from a host of securities, all formerly believed to be "safe and secure", is now being cut dramatically.

We received additional evidence of that fact this morning with the announcement that Motorola will be suspending its fourth-quarter dividend to "strengthen its balance sheet." In addition, Macy's, that bastion of retailing, stated they would cut their dividend pay-out by 62% in addition to cutting 7,000 jobs. Those shareholders who placed their retirement funds in such companies are now being devastated.

One look at the chart of Motorola illustrates the pattern. In less than three years, they have lost more than eighty percent of their capital, their dividend income has been reduced to zero, and if they sell their shares to invest the remaining funds at interest, the best they can hope for on government five year notes is about two percent.

Politically, one must ask what is going to happen when thousands, perhaps tens of thousands of seniors, are unable to continue their payments to their "care homes"? Will the government stand by idly while they are removed from their residences? We doubt it, so this is yet another factor stirring the government toward even more monetary stimulation, and we believe the likely result will be more economic uncertainty. Historically, such uncertainty has been a plus for the monetary precious metals.

The United States stock markets posted a particularly negative milestone with the loss of almost ten percent in the financial averages during January. This was the worst January loss in over 100 years and brings into consideration what is known as the "January Effect." History has shown that when January is a losing month, the averages show a loss for the entire year, in this case 2009. The rule has held true for about 75 percent of past years.

The last thing American markets need is another down indicator, but that is precisely what has happened. It is also worth noting that yesterday's performance in the Dow marked the first day that average had closed under 8,000 in more than two months.

Which leads us to another consideration; one we believe has particularly insidious implications. Given the troubles that are spreading around the world with such lightening speed, the cries for major regulatory revisions and additions have been forthcoming from many sides in virtually every direction. Economists are calling for more banking regulations. President Obama is calling for more lobbyist regulations. Bailout and rescue programs are being put forward with demands that the government regulate the salaries to be paid by private enterprise bankers. And, most worrisome to us in relation to mining, we believe that the environmental movement is gaining political ascendancy.

We believe this last item has a particularly negative implication for mining. There are already calls for revision to the American mining law, the Mining Act of 1872 - and one can be certain that the revisions will not be favorable for American mining exploration and development. We also cannot help but note that in many cases, America leads the way and Canada has a habit of following suit. The last thing junior mining companies need is a new host of environmental hoops to jump through, but that may be exactly what we see in the months and years to come.

We offer this word of advice; whatever political connections our readers have should be put on alert to recognize that this could take place and to fight as hard as possible against such new laws and regulations.

There is yet another threat on the horizon, this one being a potential assault on our human liberties. The Swiss newsletter, "The Daily Bell", just carried a story headlined "Australian Prime Minister (Kevin Rudd) calls for New World Order." They outline the fact that the 20 major economic nations, having just met at Davos, Switzerland, will be gathering again in April. Rudd's latest essay can be summed up quite easily as a denunciation of capitalism and a paean to government regulation. At Davos, German Chancellor Angela Merkel and British Prime Minister just presented speeches on the same theme. The article concluded with the note that organizers are presenting a possible plan to bring the world's economies under the direct control of the United Nations, leading to "...much expanded regulatory powers for...international credit agencies."

What is also of great note is that not one word of disagreement has come forth from the Obama Administration to these pronouncements.

Financial markets today have been relatively quiet and, as of 9:00 AM PST, the Dow Industrials are up about 35 points while Canada's TSX is down almost 40. Precious metals, however, have run into sudden selling and are now down, with gold trading near $891 and silver at $12.19 (all quotes US$). Mining share indexes had opened higher, but have retreated with the precious metals' decline. Base metals have been higher all morning with copper showing particular strength, up by over 5% so far today. Crude oil is stronger but the U.S. Dollar has shown sudden weakness, a particular surprise given gold's sharp drop. Normally, a drop in the U.S. Dollar is met by strength in gold and silver.

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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