A Melman Minute — February 20, 2009

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NOTE: In order to complete Mr. Melman's forthcoming book on the essential fundamentals of the developing international financial crisis and its relationship to gold and silver, new "Melman Minutes" will be posted only three times per week, each Monday, Wednesday and Friday until about mid-March 2009. The working title of the book will be 'Just a Melman Minute!"

The Wall Street Journal carried a banner headline this morning which tells quite a story, reading "Wave of Selling Spans Globe." Indeed, that is truly the case as markets in North America, Asia and Europe have been hit with heavy selling, continuing into this morning, which has carried many to their lowest levels since the aftermath of September 11, 2001. Some of these markets are now just a hair's breath away from setting lows for this century!

One look at the long-term chart of the Dow Industrials, going back almost 40 years, shows the magnitude of the decline since the peak just above 14,000, and also shows clearly that the only remaining chart support for the Dow lies in the 7,000 - 7,500 zone. A break below that level could quite possibly bring about panic selling.

What has been happening to the Dow Industrials in America is being reflected in markets around the world as major indexes in Japan, India, Britain, France, Germany, Austria, Russia, Norway, Spain, Italy and a host of other countries are now at or near multi-year lows and are headed down simultaneously.

All of this information leads us to a discussion of gold, and, by implication, the other precious metals.

The contrast between the two charts is obvious, and is actually in accord with historic norms which have shown that gold frequently moves in a contra-cyclical pattern from the major financial markets.

There is a great deal of discussion and debate regarding the proper investment stance for both the financial and precious metals markets. One side believes that the financial markets are dramatically oversold in an area ripe for a rebound and, therefore, speculative 'long' positions should be taken in well-qualified 'conventional' securities. The other side believes that the financial markets are in a continuing downtrend and should be avoided until clear signs of an identifiable bottoming of the indexes appear on our various charts.

Our own belief is that the primary consideration should be the direction of the major market trend and, in the case of the major securities markets, that trend is clearly to the downside and has been reinforced by the market breaking to new relative lows on high volume. Regarding the precious metals, we believe that they will continue to move contra to the trends in those markets, following the pattern which has been clearly evident for several months.

Recent fundamental economic data would appear to confirm that underlying economic conditions continue to deteriorate, and are also indicative that we have entered a truly traumatic economic era.

One of the great distinctions has to do with the attitudes and activities of the wealthy. During relatively normal recessions since the end of World War Two, most of the wealthy have continued on with their lifestyles in a virtually uninterrupted manner. That is surely not the case in the present circumstances. Economic contraction has been so severe that many in the upper echelons of personal wealth have been hit hard by the elimination of high-paid jobs; by horrendous losses in real estate investments; by immense losses in previously highly-regarded securities; by the reduction or elimination of dividend payouts; by the elimination of enormous bonus payments and by the sharp reduction in interest yields across the board.

As a result of these and other factors, the previously comfortable and secure world for many of the ultra-rich has been thrust into disarray, to put it mildly. Luxury homes in prestigious areas such as the Hamptons on Long Island have seen their values sliced in half. Many homes that were owned by executives of failed brokerage house Lehman Brothers are being put on the market at deep discount, to be joined by other homes owned by victims of the Madoff Ponzi scheme.

Art galleries are finding bids on paintings have been dropping, or have vanished entirely. Financial writer Lucette Lagnado visited Long Island and reported in the WSJ, "...A ghostly silence has settled on RVS Fine Arts, the Southampton Gallery. Owner Roberta Von Schlossberg says in flush years she could easily sell large paintings in a price range of $5,000 and $25,000. Starting in mid-September, as the financial crisis hit, she recalls Jobs Lane became so quiet "you could roll a bowling ball down the sidewalk." (All prices US$ unless otherwise noted.)

Aspen, Colorado, the ski resorts which has become the haunt of the rich over the past two decades, has seen sales of homes priced at $1 million or higher plunge by 44% in fourth quarter 2008. And, as we have reported of late, many luxury retailers such as Saks Fifth Avenue, Neiman Marcus and Tiffany's have seen marked reduction in store activity.

It may be some comfort to see the wealthy get their 'comeuppance', but that is little comfort when it reflects the dramatic reduction in personal wealth which is spreading across the economic society, as now appears to be the case.

It appears to us that the only 'weapon of choice' being selected by government after government around the world to combat this ever-spreading contraction seems to be the fiat money press. Optimism remains high that the flood of monetary stimulation being enacted will bear positive results, but watching the financial markets in action of late leaves us with a growing level of doubt.

We shall see.

This morning's markets reflect a continuation of the trends noted above. As of 9:00 AM PST, the Dow Industrials are down about 130 points while in Canada; the TSX is off by over 200. Gold and silver continue to soar with gold now trading just under the $1,000 per ounce level while silver has surged to above $14.50 and platinum is holding just under $1,100. Base metals are lower across the board with nickel being particularly hard hit, now down to below $4.25 per pound. Crude oil is retreating following yesterday's gains and the currency markets are trading quietly for the most part.

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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