A Melman Minute — March 16, 2009

6

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.

Every so often, several markets appear to reach important junctures simultaneously. We are at such a moment in the present time frame.

Please note on the long-term chart of Crude Oil that we have rallied substantially from recent lows in Crude from near $33.00 (all quotes US$) to the $50 level yesterday. Also, please note that $50 zone was one of the support areas reached when an intermediate 'bottom' formed during the long bull market which peaked near $147 per barrel. Previous support ranges frequently become resistance areas to new rises during later rallies.

Fundamentally, two cases can be made at this time. One might expect that contraction in the international financial markets would lead to further reductions in demand and lower prices, but population growth combined with anticipation of some improvement in the world's economies due to stimulation is expected to lead to increasing demand and higher prices.

The next several weeks could be vitally important for Crude.

Long term interest rates are now standing at an important juncture. As can be seen, the TYX Index has broken above previous resistance near 3.75% by rising to near 3.85% over the past few days and a new rising channel has been formed. The timing of this move has exceedingly important overtones, for, if long term rates continue to head higher, economic segments such as home sales, auto sales, large appliance sales and luxury items sales - all of which frequently require long term financing - could be hurt badly - just what the Fed and other national central banks do not want.

But they may be powerless to hold back market forces. In a recently-published study, the Ludwig Von Mises Institute (LVMI), an "Austrian" economics think tank, quoted Investment bankers Goldman Sachs' forecast for a $2.5trillion deficit this year and then listed numerous Obama Administration goals such as "...sweeping initiatives on energy, health care and education" as indications that spending would not only not come under control but could actually accelerate into the future.

How would the US government finance these coming deficits? Well, according to LVMI, there are only three means; "...higher taxes, more government borrowing, and more freshly printed Federal Reserve notes..." After pointing out that the new budgets call for less tax from many areas of the economy , they indicate that normal public debt markets are already rising in a parabolic manner, with foreign holders of American debt leading the way, but the report concludes that source may not hold for the future. If that is true, the report concludes, "...that leaves us with option three, monetization..."

However, the clear future danger is that unlimited fiat money creation could lead to rising inflation, which would drive interest rates higher and the author of the report concludes with these thoughts: "Do we already have inflation in the pipeline? I think so...My thinking is to short sell US Treasuries." (Note: long bond quotes fall when interest rates rise.)

Therefore, we conclude that movements in the TYX should be watched closely. They still remain at relatively low levels, but their recent rise from 2.5 to 3.8% should not be ignored, particularly as it has come in the face of enormous activity by the Fed and the US government to drive rates DOWN.

Out third market in flux is gold itself. Just a few weeks ago, all appeared optimistic on the gold side. The price had once again touched the $1,000 level and a break to a new historic high appeared imminent. However, gold has turned around sharply and, at $885 mid-morning today, the gold ETF chart has suddenly taken on a negative appearance and a break below $865 would suggest a test of levels considerably lower than today's, perhaps down to the $700 area.

This sudden drop in gold has taken many observers by surprise and the effect on mining share indexes has been quite dramatic as they too have dropped sharply and also appear ready to break to the downside. Therefore, the next few days could be critical and it is our opinion that investors should keep a very close eye on precious metals markets, as well as associated mining shares.

EDITORIAL COMMENT

Normally, we do not offer editorial comments, deeming it sufficient service to simply report facts and provide opinions and analysis. However, a situation is taking place in Washington, D.C. as this is written that, in our editorial opinion, is utterly reprehensible. A parade of pious-sounding U.S. Senators is pounding away at AIG, excoriating that company's payment of $165 million in bonuses to high-ranking employees of that giant insurance concern.

Where were these sages when the U.S. Treasury was squandering $170 billion - more than ONE THOUSAND TIMES THE AMOUNT OF THE BONUSES - in direct payments of taxpayer assets to the same company, monies that to a significant portion were immediately sent overseas in a manner which the American taxpayer would have forbidden, had they been given the chanCe to express their views?

It strikes us that this morning's exercise, fully endorsed and supported by President Obama who has been fomenting his own righteous indignation, is nothing but an excuse for highly-publicized corporate-bashing as part of a program, in our opinion, to utterly discredit the world of private economic activity in favor of government domination.

We believe there are dangers and uncertainties in this path which the new administration seems determined to follow. Historically, dangers and uncertainties could work well to the advantage of gold and the other precious metals.

Financial markets opened lower this morning, but have rebounded modestly while precious metals markets have been taking a sizeable hit. As of 10:00 AM PDT, the Dow Industrials were down about 80 points after trading down by 140 earlier, while the TSX has reduced a 280 point earlier loss to about -170. Gold is down by $28, silver is 55 cents lower and platinum has fallen by about $10. Base metals are close to unchanged on balance, Crude is off by about $1.50 and the U.S. Dollar is modestly lower in currency trading.

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