A Melman Minute — February 6, 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."

Sometimes, it is almost impossible to divine the convoluted thinking of market investors, and today's early morning task is particularly daunting. Normally, one would think good news would bring a positive market reaction and bad news would bring a negative reaction. To say that today's markets are acting otherwise would be a gross understatement, for the financial and political worlds in both Canada and the U.S. were hit with employment loss numbers that were truly staggering - and markets in both countries immediately headed aggressively higher!

The numbers themselves were profoundly bad. In the USA, job losses for January reached just shy of 600,000 and their unemployment rate soared to 7.6%! In Canada, the numbers were much worse on a per capital basis as the number of job losses for January hit 129,000 in a country with about one-tenth the population of its northern neighbor, and the Canadian Unemployment rate leaped from 6.6% in December to 7.2% in just one month!

Strangely enough, however, within just a few minutes of their openings, both the Dow Industrials in the USA and the TSX Index in Canada were each up by over 100 points!

Our interpretation of this seeming "bad news is good news" saga is that we believe the primary fear around the world, and one which has negatively infected security markets everywhere, is that the various economies of the world are contracting dangerously. We also believe there is still tremendous optimism that government stimulation of the economies can work.

Therefore, it is our opinion that when it appears governments are operating swiftly to pass and implement huge stimulative measures, markets move higher. When they are appearing indecisive and lacking urgency in the implementation of such measures, market stagnate or fall further. Therefore, when truly horrendous economic news comes along, large numbers of investors apparently adopt the belief that such news is exactly the instrument to prod hesitating legislators to throw in the towel and get behind the rapid enactment of those 'badly needed' laws and regulations. Ergo, markets rally on bad news, and sometimes, the more profoundly negative the news, the more the markets love such data.

Our interpretation is that while such stimulative measures may indeed provide a minor jolt to the economy and give the appearance of improvement for a while, the very creation of both debt and money at such enormous levels endangers the future of the entire society by adding to the likelihood of future robust inflation, perhaps leading to hyperinflation. Therefore, we continue to believe that insurance positions in gold and silver, including both holding the physical metals and accumulating quality mining shares (after proper consultation with registered investment professionals), are fully warranted.

We noted Wednesday that the charts of the base metals have begun to take on a healthier look than we have seen for many months. In this case, our reference is to the fact that the lowest levels in their declines are now several weeks or even months behind us. New lows are NOT being seen lately and several of the charts have actually been building significant bottoming formations. For each of our four base metals; copper, nickel, lead and zinc, the lowest price levels during their lengthy declines occurred from October (nickel) to December (copper, lead and zinc). However, and with almost no notice from most observers, prices have now advanced considerably from those lows. We offer the following table:

Metal Recent Low Present quote Percent improvement

Copper $1.26/lb $1.55 23%

Lead 0.39/lb 0.53 36%

Nickel 4.00/lb 5.25 31%

Zinc 0.47/lb 0.52 11%

Notes:

1- All quotes US$

2 - Historic figures taken from charts and are approximations

While it must be noted that current prices are still far, far below their peaks of the previous two years, such improvements remain noteworthy and we believe that these base metals rallies may also reflect the markets' growing certainty that huge stimulation will be forthcoming and that it will be at least somewhat effective in advancing raw materials demands.

Two other stories caught our eye over the past 24 hours and one of them has negative implications for the banks and they are quick to acknowledge that one of their few remaining profit centers has been credit card operations. Well, the sharp rise in joblessness is having two unwanted impacts on those operations. First, delinquencies are rising rapidly and charge-offs, that is the writing off of seriously delinquent balances against earnings, are beginning to grow. Today's huge announced increases in the Unemployment Rates in the USA and Canada will undoubtedly exacerbate the situation. Second, the flow of new income from consumer credit card charges, on which the banks involved receive a fee, is dropping. Scared consumers charge less and the newly unemployed charge little, if at all.

Rising bad debt losses combined with diminishing income accruals is hardly the mix credit card operators want to see.

One of our favorite charts continues to throw off signals that an important change in the economic winds is developing, as long-term U.S. government bond interest rates are now rising sharply, despite government efforts to hammer them down. As seen on the chart of the TYX, those rates have risen lately from near 2.5% up to about 3.7%. Perhaps bond investors are anticipating a future growing demand for money as government economic stimulation finally brings about growing economic activity.

As of 8:45 AM PST, financial markets are building on their opening rallies with the Dow now up just short of 200 points, while the TSX is ahead by almost 140. Base metals, as noted, are particularly strong while gold is holding steady near $910 while silver is adding to earlier strength, having just broken above $13.00 per ounce. Crude oil is back below $40 per barrel, the U.S. Dollar is slightly weaker on foreign exchanges and both major mining share indexes are moderately higher, but lagging slightly behind strength in the metals themselves.

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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