A Melman Minute — February 17, 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."

There may still be a few 'perma-bears' regarding precious metals out there among the investing public, but if they have placed their (fiat) money bets on the short side of gold, silver and platinum, they are truly licking their wounds this morning as the precious metals - virtually alone among all investment categories - are soaring. Early in today's trading, gold passed through $970 spot, silver reached $14.00 and platinum once again approached the $1,100 zone. (All prices US$ unless otherwise noted.) All of those quotes are multi-month highs and the price of gold is now within just $60 of its highest quote ever, when calculated in U.S. Dollars.

But the most amazing numbers - and the highest ever recorded - arise when gold is quoted in several other currencies. As of 7:15 AM this morning, we are able to put together the following table, reflecting the quote for one ounce of gold in various currencies:

Canada - C$1,225

European Community - EU764

Australia - A$1,512

Britain - 676 Pounds

Switzerland - 1,133 Sw. Francs

Clearly, overall worldwide economic and even social fear is growing and one of the most important developing stories is the massive contraction in the Japanese economy, a contraction which threatens the stability of al its trading partners. We are not talking about a slowdown in the rate of growth, or even a static, lethargic economy. The numbers now being released by the Japanese government indicate a nation with an economy plagued by a swift and dramatic decline. The data is indeed startling, particularly when it is considered that Japan represents the second largest economy on earth.

Japan's government just announced that the Fourth Quarter 2008 GDP figures showed that the overall economy contracted at an annualized rate of 12.7%. To put that figure into context, during the Great Depression, the American economy contracted by an average of about eight percent per year for each of 1930, 1931 and 1932. Therefore, what is now occurring in Japan is a downturn gathering steam at a faster rate than what took place in the world's economies during that traumatic era.

In a WSJ article this morning, Yoshiki Shineke, an economist for Dai-Ichi Life Research Institute commented, "It's very likely we'll see another double digit decline for the current quarter. Economy Minister Kaoru Yosano commented, "...Japan's economy, without a doubt, is facing the worst crisis since World War Two."

Other figures are startling. For examples, exports - which are the lifeblood of the Japanese economy - shrank by an awesome 46% from one year earlier during the first 20 days of January. Industrial output is expected to drop by 20% in the First Quarter alone and, in addition, for the first time in living memory, Japan is expected to face an actual trade deficit as importation of required raw materials exceeds the export of finished goods to America, China and other markets.

That last item could have particularly negative implications for America's economy since Japan has been using much of its trade surplus through the years to accumulate American government debt. With previous surpluses now turning into deficits, not only may Japan not be able to continue buying American government debt, it may be forced to begin selling from their present holdings, thereby depressing American bond quotes and forcing American domestic interest rates higher.

It is also a matter of great interest in our analysis that for many years, Japan has been following a course which is very similar to America's present governmental actions. These include strategies such as running heavy deficits, building up government debt, forcing interest down to virtually zero and spending government funds on various stimulative programs. One look at the Nikkei 225 Index chart for the past 23 years shows us that the net result of all that activity is that index is now down more than eighty percent from its 1989 peak and appears ready to crash to new quarter-century low levels.

And yet, it appears they have learned very little from these experiences as the Japanese government is now preparing a new economic stimulus package, estimated to total 20 to 30 trillion Yen or 218 to 327 billion dollars. Exactly how Japan plans to raise sufficient capital to fund such massive programs is a very realistic question, since we are informed that , "...it has the most debt of any country in the world, coming to 157.5% of annual GDP in the fiscal year starting in April."

One other story which we have been following is the ongoing budget crisis in California, where a $42 billion shortfall looms while their economy appears to be in a state of free-fall. Matters have reached a crisis point where the only answers appear to be some combination of raising taxes sharply, which would discourage consumption and could drive industries out of the Golden State, or reducing government services and employment, which is politically unpalatable and may not even be possible, given the power of the civil service unions. The crisis deepens, and so does the growing risk of reduction to California's all-important credit standing.

Early trends have been continuing and, as of 9:00 AM PST, financial markets are sharply lower with the Dow Industrials down by about 250 points and the TSX off by about 230. The three precious metals are continuing to hold their gains as gold has now reached $972 spot, while silver is quoted at $14.14 and platinum at $1,088. However, the base metals are headed in the opposite direction as economic difficulties appear to be deepening further. Latest quotes show all metals down sharply this morning with copper quoted at $1.43 per pound, nickel at $4.40 and both lead and zinc are once again under 50 cents per pound.

In other markets, crude oil is lower by about $3.00 to near $34.50 per barrel and the Canadian dollar is falling sharply, now quoted at barely 79 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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