A Melman Minute — April 7, 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!"

Well, just back from Calgary where we presented our "On the road to Hyperinflation???" workshop and participated in a panel discussion on Sunday AM. Both were well attended and we appreciate the interest and support.

Several important news events that occurred during our Calgary absence are worth noting, and perhaps none has gathered quite the attention as the latest American employment report. On Friday, April 4, the U.S. Department of Labor released their report for March 2009 which put a serious damper on the growing levels of enthusiasm that the American economy might already be rebounding from the (so-called) recession. Not only did the preliminary figures for March show the loss of another 663,000 jobs, but the job loss numbers for January and February were revised to show even greater losses than had previously been reported. Most astonishingly, the combined figures for those two months now indicate that a total of one million, three hundred ninety-two thousand jobs vanished in those two months alone. Combined with the devastating March numbers, the total job losses for the First Quarter 2009 now stand at greater than two million!

As if that raw data was not sufficient alone, it was accompanied by the fact that the official Unemployment Rate rose to 8.5 percent, the highest in twenty-six years and leading economists such as David Greenlaw and Ted Wiesman of Morgan Stanley look for the rate to reach or even exceed 10% during the second half of 2009. An article by Marketwatch also noted that, "Leading employment indicators - such as jobless claims or the number of temporary workers - have worsened in recent months."

Another item impossible to avoid was the sudden sharp drop in the price of gold during the past several days, a decline which is being partially reversed as of this morning. As can be seen on the Gold ETF chart, gold plunged by more than $60 last week before recovering about $15 of that loss so far this morning.

The most prominent explanation for the sudden drop in the yellow metal's price was talk emanating from the recently-concluded G-20 meeting in London regarding the institution of a new round of central bank gold selling to create a fund for the benefit of stimulating several national economies. Another explanation receiving wide attention was that much of last week's selling was the type that normally occurs in precious metals during sharp securities market rallies.

We at TMR do not necessarily share the view that additional central bank selling will, over time, reduce neither the demand for gold nor its price. Long time followers of the fortunes of gold may recall an analogous situation that developed during the late 1970's.

Following one of the most spectacular golden bulls in history, which lasted from 1969 through the end of 1974 and which saw gold rally from near $40 per ounce to $200, gold sold off steadily throughout all of 1975 and the first half of 1976, before bottoming near $105. Gold historians might recall that one of the dramatic events which accounted for the great rally was the anticipation of re-legalization of private gold holdings which took effect January 1, 1975 - and much of the 1975-6 decline was blamed on the subsequent lack of interest in gold among the general public.

Of particular relevance to our present situation was the announcement by the International Monetary Fund in late 1976 that it was going to sell gold from its substantial holdings on a monthly basis. The first few auctions did indeed drive the price lower, but then a strange pattern began to develop. As each auction was announced, the price of gold began to rally on the realization that gold was moving from weak hands (central bankers) into stronger hands (private holders). These monthly rallies began to form a rising pattern in gold's chart and a new bull market was born, culminating in the huge upward spike in January, 1980 which carried gold to the $850 level.

It would not surprise us at all if these anticipated sales of gold from central banks into the hands of private holders would not once again strengthen the overall position of the precious metals, should such sales take place as discussed.

The present situation regarding long-term interest rates for 30-year American government bonds continues to confound observers as those rates have made yet another trip inside the trading channel between the high area of 3.8% and the lows near 3.45%. The chart of the closely-watched TYX Index shows that since that interest rate recovered to the 3.8% area in early February, it has made no less than eleven trips up and down within that general range, with the chart once again near its top area.

It is as if two battle groups, perhaps named "Government's ability to force rates lower" and "Fears of inflation driving rates higher" are in an almost eerie balance. For that reason, we believe the ultimate resolution of this 'conflict' could hold great importance regarding future international economic developments.

(Fears of potential rising inflation and even possible hyperinflation were the subject of our Sunday workshop, a transcript of which will be posted on this site during the next few days.)

Securities markets this morning have been particularly active with most in decline. On the other hand, precious metals were trading higher and base metals were rising sharply. As of 9:30 AM PDT, the Dow Industrials were off by about 170 points and Canada's TSX was down by close to 120. Gold was ahead by $14 on the session, trading near a spot price of $883 while silver was also stronger, up by about 20 cents to near $12.30 per ounce while platinum was up by more than $20 to near $1,165.

Copper has shown particular strength of late and has now returned to just under $2.00 per pound, the highest price in several months. Nickel is also on the rise, now selling for nearly $5.00 per pound and both zinc and lead have once again exceeded the 60 cents per pound level. Both major mining share indexes are ahead by about two percent, crude oil is hovering near $50 per barrel, and the U.S. Dollar is slightly higher in currency trading.

(All quotes 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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