A Melman Minute — March 11, 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!"

NOTE: Due to travel commitments which will keep us out of computer range for a few days, our revised "Melman Minute" schedule for the next two weeks will be today and Tuesday this week and then Monday, Tuesday, Wednesday and Thursday next week, reporting from the giant PDAC Convention in Toronto.

One of our long-standing themes is that perhaps the penultimate danger to the world's economic structure lies in the fact that there are two major dangers relating to the massive worldwide economic stimulation that has already taken place and which continues to grows relentlessly.

In the first case, all the stimulation may not work and the world's economies may continue to contract, driving them deeper into depression, adding to unemployment, reducing government's ability to provide services and expanding the roster of failed businesses and industries.

In the second case, if all the stimulation does indeed provide for some economic growth, it is our opinion at TMR that an even greater peril looms. An article in this morning's "Telegraph" newspaper out of London, England discussed the issue. The article addressed the fact that any government stimulation of the economy involves the issuance of enormous debt and that explosion of debt, that is supply, will cause the price of British bonds to fall, which, in turn, will drive interest rates higher.

Bonds issued by the U.K. government are called "Gilts" and the article points out, "...Indeed, numbers were being bandied around suggesting Gilt issuance in the region of 120 billion Pounds or more, and even the head of the Government's own Debt Management Office (DMO) warned of the possibility of failed Gilt auctions in 2009 as the sums required seemed to be unmanageable." (our emphasis)

After describing the technique of the U.K. government stimulating the economy by flooding the market with newly-created currency, they tackle the important question of whether such schemes will work. "The answer is that while it may end deflation and recession, there is a cost: there will (not may) be higher inflation down the road. Since Emperor Nero started clipping coins 2000 years ago, all attempts in history by governments to print money to pay for their overspending have eventually led to inflation. (our emphasis)

It is our belief at TMR that higher inflation, such as the Telegraph suggests, will lead to rising interest rates which would then threaten their recovering economies and which would be fought tooth and nail by central banks - and it appears to us that their only weapon would then be massive additional creation of unbacked currencies to try and force interest rates lower. Our fundamental belief is that such actions would set the stage for the development of the worst of all economic dangers, hyperinflation.

We are at an interesting juncture in the chart of the USA's long bonds. The TYX Index, which measures the rate paid on 30-year US Treasury bonds, rose sharply from the area of 2.5% a few months ago, but then has traded within a remarkably narrow range, from 3.45% to about 3.75%, and has made at least eight passes up and down within that range. Today's trading shows the TYX hard against the top of the range. It will be most interesting to see if this is the drive that propels rates to a new multi-month high.

If anyone believes that talk of hyperinflation or failure of government debt is remote nonsense, the following table might be of interest. On the day Barak Obama became President, the United States National Debt stood at $10.625 trillion. What has happened since is utterly amazing from a historic point of view. Quite literally, the time span required to add one hundred billion U.S. dollars to their national debt has been reduced to a matter of days.

Date 2009 Debt

January 21 $10.625 trillion

February 12 $10.759 "

February 20 $10.838 "

March 05 $10.953 "

Since Obama's Inauguration, it took 22 days to add $100 billion to their national debt, 30 days to add $200 billion and only 43 days to add $300 billion. Given that the rush of new stimulative and social programs is only just beginning, we can only stand back in awe and wonder what might lie ahead.

Yesterday, we noted that three of the base metals, copper, lead and zinc; had formed bases in their charts and were actually improving in price over the past few months. Those charts appear below and it can be seen that copper has moved from below $1.30 to near $1.70; zinc from 46 cents to 56; and lead from 40 to 57 cents - all gaining more than 20 percent from their lows and each chart shows a distinct 'bottoming' pattern as well. .

Our interpretation is that some improvement in base metals orders might be taking place, thanks to optimism that renewed economic strength will occur, considering all of the bailout, rescue and other stimulative programs now in effect. Whether there will be lasting improvement is another story, but, at least for the time being, some of the junior mining shares involved in these metals might be worth consideration for investors willing to accept an appropriate level of risk.

(As always, we caution that any investments should be made only after consultation with a registered investment professional.)

Lest one think that the American real estate debacle is now over, they should think again as yet another giant problem is now developing. As banks, Savings and Loans and other mortgage lenders attempt to sell off their overhang of foreclosed properties, they are driving prices downward, and, according to the Wall Street Journal, those declines have now reached the point where home builders are unable to sell their newly-constructed residences at break-even. They give an example one homebuilder in Southern California attempting to sell a new home for $299,000 while identical foreclosed homes in the same area are selling for $229,000. The problem is becoming both acute and widespread and, as the WSJ notes, "...Small builders are dying by the dozens..." And so the spiral continues. Failed companies lay off workers; those workers buy less goods and services (including homes); businesses in the areas decline, laying off more workers, etc. (our emphasis)

Financial markets today are taking a bit of a breather from the spectacular rallies of yesterday. As of 9:30 AM PDT, Canada's TSX is benefiting by higher precious metals prices and is up about 150 points while the Dow Industrials are ahead by only 15. Base metals are trading slightly lower on balance, but precious metals are showing good gains with gold, silver and platinum up by $10, 24 cents and $7 respectively. Mining share indexes are strongly higher, the U.S. Dollar is slightly weaker and crude oil has given back some of its recent gains and is trading near $44.50 per barrel.

(All quotes US$ unless otherwise noted.)

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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