A Melman Minute — March 23, 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.

NOTE: Mr. Melman will be presenting a workshop at the upcoming "Calgary Resource Investment Conference" presented by Cambridge House in Calgary, Alberta April 4-5. His topic will be "On the Road to Hyperinflation???" updated for this presentation. Information concerning the conference itself can be obtained at www.cambridgehouse.ca.

We have mentioned this theme before, but it bears repeating. Markets no longer move primarily on the collective impact of news about individual companies - which was the norm for previous decades of securities exchange trading. They now move primarily on the presumed impact of government actions. This is becoming even truer of late as the government enacts policies impacting specific companies and industries, and thereby gains a toe-hold in the actual running of affected enterprises.

The great question then becomes one of whether an economy run by government is likely to have a better outcome than one run by the collective interaction between private entrepreneurs and their consuming customers. That question remains unanswered, except for one specific and frightening thought. Every past and present (Zimbabwe) incidence of hyperinflation has come about during periods of government domination of economic structures. Not one has ever occurred during periods of truly limited government intervention combined with a currency of gold and silver.

Clearly, America has entered a period of rising government intervention in that nation's economy.

This morning is a classic example of a government statement regarding a specific situation followed by the financial market's roaring approval of such action.

Perhaps the greatest single problem facing the financial world at present is what to do with the accumulated "toxic assets" now clogging up the balance sheets of the nation's banks. Well, over the weekend, Treasury Secretary Geithner published his answer in a lengthy letter to the American public - and worldwide financial markets have gone on a buying rampage this morning in celebration.

First, he reviewed some of the steps already taken by the Obama Administration including; implementation of the Recovery and Reinvestment Program; initiatives to stabilize the housing market, established new capital programs for banks; starting a major new lending program targeted at the securitization markets; and additional actions to purchase securities backed by the Small Business Administration as well as programs to bring interest rates to historic lows. Quite a list, indeed, but the question of toxic assets still remained unaddressed - which led to his description of the new program, which has three components.

"...First, they will use government resources in the form of capital from the Treasury, and financing from the FDIC and Federal Reserve, to mobilize capital from private investors...Second, ensure that private-sector participants share the risks alongside the taxpayer, and the taxpayer shares in the profits from these investments...Third, private-sector purchasers will establish the value of the loans and securities purchased under the program." The goal of the program is straightforward, namely, to "...get credit flowing to working families and businesses - large and small - across this nation."

There is an old saying that goes, "There is nothing new under the sun" and that appears to hold true for the present case. One need only look at the chart of Japan's Nikkei Index over the past twenty years to find an analogous example. Japan also faced a similar crisis of inflated real estate values collapsing, followed by toxic debt throughout their banking systems, and they took actions which were remarkably similar to those of the U.S. government in the recent crisis. They drove interest rates down to zero, used government funds to support the banks and ran horrendous deficits.

We would also pose what to us is a vitally important query. If the goal is to increase lending to "families and businesses", we must ask just who would be submitting the applications for these loans? Capacity Utilization for January was barely 72%, so more than one-quarter of America's industrial machinery now sits idle, making it unlikely industrialists would want to borrow to expand and, in addition, the "Inventory-to-Sales" ratio has grown by 15% during the past year, making it unlikely wholesalers and retailers will be doing much ordering of new product until this inventory is worked off. In addition, most prudent families are reducing their obligations in this time of uncertainty, not expanding them.

However, in the short run, it appears likely that thanks to previously enacted government stimulative actions, along with the new one, we can anticipate some increase in business activity. Therefore, as noted last week, we are now of the opinion that appropriate investments in both precious metals and base metals securities could work out well over the near to intermediate term. (See disclaimers)

Lots of questions - but financial markets don't seem to care this morning as they enjoy this new burst of optimism. As of 9:30 AM PDT, both the Dow Industrials and Toronto's TSX are sharply higher, up about 325 and 400 points respectively. Precious metals were holding well despite the Index rallies with gold and silver close to unchanged and

platinum ahead nearly $20. In the base metals, nickel, lead and zinc were little changed, but copper was exceptionally strong, trading a high as $1.84 in morning trading. Crude Oil was also sharply higher, reaching close to $54 per barrel, the highest price in several months. In currency trading, both the US$ and the C$ were on the rise.

(All prices 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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