A Melman Minute — March 25, 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 making a panel appearance and presenting a workshop at the upcoming "Calgary Resource Investment Conference" April 4-5. His workshop topic will be "On the Road to Hyperinflation???" updated for this presentation. Information concerning the conference itself can be obtained at www.cambridgehouse.ca.

While most of the world's attention of late has been focused on matters relating to the international economy and the machinations of the new Obama Administration in America, other facets of this globe still exist and should not be ignored. One of these important areas is the Middle East, where old hatreds and conflicts still simmer just below the surface of the world's attention.

Perhaps the most threatening of all is the Iran-Israel situation, because it could lead to armed conflict between two powerful enemies, with the issue of nuclear weaponry lying at the heart of the matter. Simply put, based on the demonstrated hatred of Iran to the State of Israel, that latter nation has a deep and lasting fear that Iran will soon be the possessors of weapons-grade uranium.

Within Israeli politics, there are two schools of thought. The first would be to rely on international pressure to force Iran to 'behave themselves' and limit their nuclear research to the production of fuel-grade uranium for nuclear power plants. The second states clearly that once proof exists that weapons-grade uranium is being produced, Israel must consider swift and decisive action to remove such a lethal threat. The former group is referred to as "doves" while the latter are known as "hawks."

Chief among the hawks is Benyamin "Bibi" Netanyahu who has emerged from Israel's recent election as the Prime Minister designate, pending his ability to put together a workable majority government. That effort just received the boost it needed with the announcement by the Labor Party of Israel that they would join Netanyahu's Likud Party in a coalition government. With Labor's support, Likud now controls 66 seats in Israel's 130-seat parliament. If the agreement with Labor holds and Netanyahu is confirmed as Prime Minister, it appears likely that tensions in the already-explosive area will heighten - and increased tensions have historically been a plus for the world of precious metals.

We shall see, but it appears likely that events in the Middle East could once again command greater attention.

Economic news released by the American government has recently taken a decidedly optimistic turn. During the past few days we have been receiving hints that matters are suddenly improving and this morning, two new releases drove financial markets higher. These included New Home Sales and Durable Goods Orders, both for February.

After months of remorseless decline, New Home Sales suddenly showed a 4.7% increase over January's figures. Most observers had been expecting a continued decline. While February's figure is the lowest such figure for that month going back to 1963, the sudden increase from the previous month is being regarded by many as a 'straw in the wind' that matters might be on the mend in residential real estate sector.

Ditto for the Durable Goods figure. While most observers had been expecting further declines, in fact the Commerce Department reported a 3.4% gain for February. The improvement was attributed to rising orders for machinery and other capital goods. Economists differed in their interpretation of this figure with some claiming it is merely an aberration within a continuing downtrend trend, but some, like Stephen Gallagher, chief economist at Societe General, declaring to AP that the improved figure was, "...consistent with our view for positive real GDP in the second half of 2009."

News from the rest of the world's economies continues to have negative overtones, and nowhere is this more evident than in Japan. Two huge bombshells hit their newswires overnight and both related to Japan's exports.

For the nation as a whole, the government reported that exports fell by nearly half during February from the year-earlier numbers. The Ministry of Finance figures showed a stunning drop of 49.3%, the largest on record since this data series began in 1980. As Financial Writer Tomoko A. Hosaka wrote about the Japanese economy, "... (it) now finds itself mired in its deepest recession since the end of World War II. The International Monetary Fund expects the economy to contract 5.8% for the 2009 calendar year, though many economists predict it could be far worse."

If information released last night by Toyota Motors is any indications, those economists' fear may indeed be realized. Toyota just announced they were cutting their planned production in half and also anticipated their first operating loss since 1950.

Our concern is this: Japan has been a major purchaser of U.S. government debt over the past few years. If their economic contraction continues to deepen, not only may it become impossible for them to purchase new debt, but they may be forced to sell from their present holdings, putting downward pressure on U.S. government bonds and thereby forcing long term interest rates higher, thereby forcing even further currency creation on the part of the U.S. government to fight rising interest rates - a policy that is being denounced in Europe where past calamitous periods of hyperinflation are still deeply engrained in the minds of the populace.

One Economic Union leader, Czeck Prime Minister Mirek Topolanek told the European parliament that Obama's massive stimulus and banking bailouts, both costing hundreds of billions or even trillions of dollars, combined with his "Buy America" advocacy, were policies that were, "...not the right path (and were)...the way to hell."

One of the misconceptions of late is that mining investments are ALL headed downward, but that is not the case. Several juniors, along with major mining corporations, have seen rallies of late and some of them have been sizeable. We also note that both major mining indexes have just broken to the upside and are reaching their highest levels in several months. Their charts are reproduced below.

Metals markets are mixed this morning with precious metals showing little change on balance while base metals have fallen back slightly from their recent highs, but remain far above their lowest levels of last fall. Financial markets opened higher on the US government's good news releases and, as of 9:15 AM PDT, the Dow Industrials were ahead by about 150 points while Canada's TSX was up by 85. Both Crude Oil and the US Dollar Index were trading moderately lower.

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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