A Melman Minute — March 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!"

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.

Anyone who doubts the power of the U.S. government to move financial markets got an object lesson on March 18 that is not likely to be forgotten for years to come. Quite suddenly, and utterly unannounced in advance, the Federal Reserve told the world it was going to buy $300 billion worth of outstanding government bonds. Upon that announcement, and with incredible swiftness, four distinct moves took place, all well illustrated by the accompanying charts:

* - The U.S. Dollar went into a tailspin, as markets reacted to fears of outright monetization;

* - Gold went skyrocketing, moving up by over $60 in short order;

* - Long term interest rates plunged; and

* - The Dow Jones Industrials went into a frantic rally, gaining over 200 points within minutes.

It is interesting to note that these sudden moves confirmed, at least in this dramatic example, the opposite directions of gold and the U.S. Dollar during a period of crisis as gold rose at almost precisely the rate the Greenback declined.

It is also very interesting to note that markets appear to be taking a hard, second look at the 'wisdom' of the Fed's move. While governments now give a fancy new name, "Quantitative Easing", to artificial currency creation by central banks, it appears to us to be nothing other than good, old-fashioned, monetization of debt, and that action has frequently led in the past to roaring inflation and even HYPERINFLATION. Yesterday and early this morning, it appears that fears of such consequences quickly dulled the stock market's advances, sent gold even higher, sent the Greenback even lower and stalled the decline in long term rates.

CHANGE OF LONG TERM EMPHASIS AT TMR

It is our opinion at The Melman Report that Wednesday's actions represented a 'point of no return' for the American government's financial policies. By announcing an obviously fiat-based-money intrusion into previously (relatively) free markets, the Fed was clearly stating that "Quantitative Easing" would form an important segment of their future actions. This has been reinforced by several other governments around the world, including the U.K and Canada. It is also worth noting that calls are becoming ever more strident for an international financial regulatory body which we believe will be able to coordinate these bailouts, rescues and stimulations around the world.

We cannot help but note that while the world's largest and most important economy, that of the United States of America, has been leaning in the direction of government intervention into the economy, such actions have been somewhat restrained to date. However, when one looks at the interventionist, financially liberal makeup of the American financial and political power echelons, the picture becomes clear. Never in the history of America has such concentrated financial power been held in the hands of proven Leftist-Socialists. Not one of the following leaders appears to advocate anything resembling a program of limited government intrusion into markets, diminishing the creation of additional fiat currency, backing money with sound value (such as gold or silver) or strongly supporting free market principles.

The main players are:

President Barak Obama

Federal Reserve Chairman Ben Bernanke

Secretary of the Treasury Timothy Geithner

House Speaker Nancy Pelosi

Senate Majority Leader Harry Reid

House Banking Committee Chairman Barney Frank

Accordingly, we now believe that stimulative actions will be forthcoming indefinitely and that eventually, these will have some effect in advancing economic activity, and this will include some increases in demand for base metals. We also believe that the enormous creation of oceans of fiat currency cannot help but increase inflationary pressures down the road - perhaps even leading to hyperinflation - and, therefore, such actions support our positive long term outlook for gold and silver.

Therefore, in our opinion, carefully researched positions in mining companies exploring for and producing both base and precious metals are worthy of serious consideration. Of course, we repeat our caution that no investments should be made without prior consultation with a registered investment professional.

One last item is worth discussing. We have offered one special piece of advice for many months and we repeat it today. When it comes to government taxation, hang on to your wallets! We believe that governments at virtually all levels, desperate for revenue to even remotely balance their budgets, will attack virtually any source of wealth which can be targeted. Here are some recent examples.

In Winnipeg, speed traps via photo radar have been set up in idled construction areas, with fines at double the normal rate. In Ontario, discussion is now active to raise the provincial sales tax. In California, sales taxes, cigarette taxes, state income taxes and auto license fees are all headed higher. In Illinois, the Governor has just proposed a fifty percent increase in state income tax. Massachusetts and New York are discussing similar measures. Gasoline taxes and environmental fees are headed upward in many jurisdictions - and the momentum for additional tax revenues is soaring. Simply put, watch out!

Markets this morning have been on the quiet side. As of 9:30 AM PDT, both the Dow Industrials and the TSX averages are close to unchanged; gold, silver and platinum are holding close to their recent recovery highs; base metals are off slightly on balance; mining share indexes are up slightly and the U.S. Dollar Index is just above recent lows. Crude oil is continuing its rising pattern of late and now stands just under US$52 per barrel.

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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