A Melman Minute — March 27, 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.

To say that it is difficult to predict exactly how great public political and financial events will impact the world of precious and base metals is an understatement, and this morning's news background provides us with a clear example of how actual market moves can easily take place in opposite directions from what might have been expected.

We note, for example, that interest rates are once again being forced lower (see short-term chart of the TYX Index); yet another major corporation, Johnson Controls, has announced plant closings and heavy layoffs; legislation is being introduced in America to enact broad new financial legislation which will require massive additional bureaucracies and government expenditures; and the securities markets have opened lower which 'normally' would indicate higher precious metals prices.

However, we must note that as of 9:20 AM PDT, gold is down $11.00, silver is down twenty cents and platinum is down by $17.00. (All quotes US$.) This simply highlights the unpredictability of markets, something investors should be aware of at all times.

One specific area of American government action must be examined from several points of view. We are referring to existing or planned intervention by government into the workings of the financial marketplace, for there are indications that such interventions are about to be dramatically expanded.

We note a detailed article in this morning's Wall Street Journal devoted to an analysis of the latest proposals presented by Treasury Secretary Timothy Geithner. The article is entitled "Treasury Maps New Era of Regulation" and leads off with this comment...

"Treasury Secretary Timothy Geithner called on lawmakers Thursday to enact the most comprehensive changes in financial-market regulation since the New Deal..." As the article points out, "...The Obama Administration hopes to replace or revamp existing rules for almost every corner of financial markets, from mortgages to money-market funds, from banks that are too big to fail to the "shadow" financial system that operates largely outside government control."

We are informed that there are four general areas where new regulations will be proposed - and it is our belief that given the Democratic Party's huge majorities in both the House and Senate, combined with the public's present antipathy toward financial management, the new regulations would appear likely to be enacted. The four areas are:

* - limiting risks that could threaten the broader economy,

* - enhancing protections for investors and consumers,

* - closing gaps in regulatory oversight, and,

* - coordinating any actions globally. (Our emphasis)

The last item stands out, in our opinion, because it follows on numerous recent statements from such personages as the Prime Ministers of Australia and Great Britain, along with the President of Germany and the government of China, for an umbrella of international financial regulations.

Our financial concerns relate to the fact that such intensive regulations normally diminish the efficiency of business and add substantially to the costs of operations. We would, therefore, anticipate that such new laws and standards would enhance the likelihood of more business failures, which would then be required to be propped up by government, adding to already enormous deficits which then would require additional increments of debts, making the entire structure more unwieldy, not less.

We also cannot ignore the fact that Mr. Geithner's dramatic proposals are coming just prior to the upcoming "Group of Twenty" economic summit in London which will be attended by President Obama, among others. Many observers would take Geithner's timing to be a 'de facto' endorsement of the concept of international financial regulation, perhaps under the umbrella of the International Monetary Fund.

We cannot help but also express the personal concern that such extensive legislation, literally without precedent in American history, could have enormous impact on concepts of personal freedoms, particularly those relating to previously free markets. One comment by the WSJ struck us as particularly ominous and it reads, "...Key to the plan is an effort to let the government seize and deconstruct a large, failing financial company that can't currently be taken over by the FDIC. Mr. Geithner said the government needs these powers immediately and called on Congress to pass a law in this area."

We read this to mean that once a company is helped financially by government, the government could then assume full or partial ownership and re-write the bylaws of the company to accommodate complete government takeover.

We are not alone in such fears. Representative Don Mazullo of Illinois commented, "You're talking about seizing private business - you don't consider that to be radical?"

The skeptical side of your editor also cannot help but note that the largest single group of contributors to the Obama campaign was the American legal profession. It is difficult to imagine a greater reward for their stalwart support than for the Administration to hand a virtual guarantee of unlimited government work for attorneys for the drafting of such an array of complex laws and regulations, and then additional work which is likely to occur as a result of suits and prosecutions arising from their enforcement.

It is our belief that all of this complexity, combined with huge new increments of government expenditures for infrastructure, health care, education, old age services, financial regulations, bailouts, rescue plans, etc., cannot help but provide a background for enhancing the possibility of future inflation, and therefore, for future rallies in the precious metals.

As of 10:00 AM, precious metals remain lower and close to the quotes noted above; base metals and mining share indexes are also down moderately; Crude Oil is down by about $2.20; and the US Dollar is stronger in currency markets. In major stock markets, the Dow Industrials are now down just under 150 points while the TSX has form early selling and is now close to unchanged.

NOTE: Just as today's MM was being completed, the U.S. Department of Labor released a report showing that seven states in America now have unemployment rates greater than ten percent! That would appear to augur for even greater increments of stimulation.

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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