A Melman Minute — February 11, 2009

6

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."

February 11, 2009 could well go down as a true, 'red-letter day' in gold's history. First, gold rallied sharply this morning to break out into short-term bullish territory. As can be seen from the chart, gold has clearly broken above previous congestion and is now moving decisively higher. Second, in terms of the Canadian Dollar, gold has just smashed to its highest level in history!

As of 7:20 AM PST, we have the following spot quotes:

Gold - $944 spot

Canadian Dollar - .8012

(All quotes US$ unless otherwise noted)

This gives us an effective spot price for gold of C$1,178 per ounce! It is also worth noting that the price of gold in Euros, British Pounds and Swiss Francs is also at historic high levels.

The metals celebration is not confined to gold as both silver and platinum are showing good relative strength. Both silver and platinum have also made short term chart breakouts with silver reaching above $13.50 per ounce and platinum rising above $1,050 in early trading.

Clearly, the latest efforts of the Obama Administration in general and new Treasury Secretary Geithner in particular are failing to inspire any sustainable level of confidence among the international financial community. The plans are fluctuating from day to day and week to week, and seem to call for ever-higher dollar creation and, in our opinion, it is the uncertainties generated by the inability of government to create a consistently workable plan that is providing much of the 'stimulus' for the recent moves in the precious metals.

Somehow, we doubt this is the kind of 'stimulus' the monetary authorities have been envisioning. In any case, the financial markets voted with their wallets and feet yesterday as the markets plunged in the wake of the Administration's latest pronouncements, which now include a multi-programmed approach to stimulating the economies and get the banking industry functioning efficiently once again. The new 'price tag' is approaching an additional three trillion dollars and the markets collectively gagged when they encountered these numbers, with the Dow Industrials plunging by almost four hundred points. Asian and European markets also sold off last night and into this morning.

We also believe that it does not help that new President Obama is using 'hard sell' techniques in telling audiences that a massive calamity awaits America and the world unless decisive, stimulative action is taken immediately to forestall catastrophe and calamity.

By the way, the USA is hardly the only nation where such tactics are now being used. The Bank of England Governor Mervyn King just told Britain that their country was now in a deep recession that was bound to get worse, but his bank was ready, as an AP story told us this morning, "...to in effect print money to get the economy going again." We are then told that this is part of a new fifty billion Pound asset purchase facility to transfer non-performing assets from the banks to the government to free up lending capacity.

Governor King's great fear is that Britain will descend into a period of deflation by 2010 and it was the Bank of England's policy to avoid such a situation - ergo, monetary stimulation and creation on a huge scale.

We have often expressed a preference on these pages to free market economics over government domination; for lower taxes instead of higher; for reduced government expenditures over rising levels and for a continual vigilance and fight against inflation, rather than adopting policies which appear likely to fan those inflationary flames.

We are hardly alone. There are several important institutions which sponsor the promulgation of just policies, and from time to time, our own writings have been cited on such websites. Also, from time to time, prominent publications such as the Wall Street Journal offer opinion writers the chance to express such views. This morning was such a time when an opinion piece entitled "Reaganomics vs. Obamanomics" appeared. The author, Peter Ferrara, present director of entitlement budget policy for the Institution for Policy Innovation, offered four sharp contrasts between the two philosophies.

First, Reagan enacted "...sharp, across-the-board reductions in tax rates"

Second was "...deregulation to remove unnecessary costs on the economy"

Third was "...the control of government spending"

Fourth was "...tight, anti-inflationary monetary policy.

Mr. Ferrara credits such policies for transforming an economy which Reagan inherited in early 1981 which was, "...far worse than today's. We were suffering from multiyear, double-digit inflation, double-digit unemployment, double-digit interest rates, declining incomes and rising poverty."

He points to the contrasting philosophies of Mr. Obama which he believes include:

* - Massive future increases in taxation by eliminating previous cuts

* - Massive increases in government spending, the largest such increases in history

* - Huge acts of government currency creation and reflation

* - Advocating huge increases in government regulations, particularly those relating to energy production.

Ferraro, who once served in the Reagan White House in the Office of Policy Development, fears that any recovery of the economy under Obamanomics will not be what it could be and, "...unemployment will remain too high, and inflation will resurge, recreating the disastrous economic results we suffered the last time Keynesian policies were dominant. (That is, under the Democratic-dominated Jimmy Carter years - LMM)

We cannot help but wonder if the new surge in precious metals quotes could be interpreted as reaction to growing fears that people like Ferrara may be correct, and reflation on a substantial scale lies ahead.

As of 9:30 AM PST precious metals are holding their gains with gold trading near $942, silver at $13.59 and platinum now slightly higher than $1,060. Base metals are little changed on balance but both major mining share indexes are moving strongly higher, each up by 7-8%. Crude oil and the U.S. Dollar are both little changed in commodity and foreign exchange trading while on financial markets, the Dow Industrials and the Canadian TSX are each up between 50 and 70 points.

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.

← All A Melman Minute