A Melman Minute — April 13, 2009

6

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!"

For a very pleasant change, we have some positive news to report this morning regarding our world of base and precious metals mining.

First, an important new force may be emerging which could enable companies to have public backing in favor of new mining projects. That force, simply enough, is economic necessity and a case in point is the BHP - Rio Tinto Resolution Mine copper project in Arizona. According to an article in the Wall Street Journal this AM, public opinion in the area is undergoing a change toward favoring the project as the need for new jobs in central Arizona is becoming acute.

Apparently, the nearby towns of Superior, Miami and Kearny have been particularly hard hit by the economic slowdown in general and the copper mining contraction in particular. The population of Superior has dropped from 6,000 to 3,000, empty storefronts abound and real estate prices have collapsed. Therefore, the public is truly in the mood to support a huge project which will employ area residents during the development phase, production construction and, according to estimates, over 1,000 permanent jobs should the mine achieve projected production levels. It also is increasingly attractive that a project such as the Resolution Mine would not involve any expenditure by government.

Second, industrial giant General Electric just made a $69 million investment in "A123 Systems, Inc", a major car battery development company. A123's stated goal is to develop a lithium-ion battery suitable for the growing hybrid vehicle market as well as the potentially huge electric vehicle field. Given that A123 plans to build their factory in economically-deprived areas of Michigan, the project is also likely to have substantial area public support, just as in the case of the Resolution Mine.

Several junior mining companies are involved in the search for and development of lithium properties and such news provides encouragement for their efforts.

Lastly, we note that gold has reversed its recent selling and is sharply higher this morning, along with silver, platinum with the almost all the base metals. Much of the background speculation is that Chinese demand is going to be rising substantially as they activate phases of their giant infrastructure development programs and this will increase demand for virtually all metals.

However, news in the financial markets is less favorable and they have opened lower this morning. The chief concern appears to be serious questions regarding the future course of corporate earnings, which are about to be published for the First Quarter 2009. Speculation is rising that they may be worse than expected and, in addition, there is increasing talk of an imminent General Motors bankruptcy filing. Among the earnings numbers to be released over the next few days are important corporate financial giants such as Goldman Sachs, JP Morgan Chase and Citigroup. That category has been particularly hard hit by the financial crisis and observers will be watching closely for signs of concrete improvement in operations. Any failure to deliver such improvements could hit markets particularly hard.

Another group of corporate earnings certain to come under increasing scrutiny are the petroleum producing and refining companies. Serious studies are beginning to suggest that historic patterns of ever-rising consumption of refined products could be undergoing serious changes. Among the factors being considered are a growing pattern of residing near city centers rather than far flung suburbs and exurbs; the development of hybrid and electric vehicles; the public sentiment toward increasing use of public transportation; and the government-mandated improvements in fleet miles per gallon performance. In addition, this recession appears to have 'legs' and poor overall economic performance, if it endures for several years to come, could also serve to limit gasoline consumption.

According to the U.S. Energy Information Service (EIA), the total consumption of all transportation-based petroleum fuel dropped by a huge 7.1% last year and further contractions in demand are forecast for the current year. This is the sharpest reversal in fuel consumption since 1950 and has staggering implications for overall economic performance, including a reduction in government collection of tax revenues from both fuel consumption and diminished corporate profits taxation from the petroleum giants.

This is a trend worth watching because rising fuel consumption and rising prices have been an important factor in building past visible price inflationary pressures which have been of benefit to various metals quotes. However, on the positive side, continued low fuel costs would be of great assistance to the mining industry's exploration and development efforts.

It appears to us that many of the world's markets are now at a particularly important juncture. After falling dramatically through early March, virtually all markets have rallied vigorously in the past weeks, and now stand close to areas where we believe they will reach resistance, turn down, and then continue in a bearish mode - or they will break through to higher ground and completely reverse the previous bearish trends.

Our chart of the Dow Jones Industrial Average illustrates the point. The recent rally, which has generated such immediate and powerful optimism from many market observers, has merely served to recover to an area of clear chart resistance near the 8,000 level. The vital question is whether it will turn down in the near future or not.

It is also worth noting that many of the other important world markets have performed with even greater vigor than those in the USA during the recent rally. Among those rallying in a particularly aggressive manner have been Brazil, South Korea and Russia. A Morgan Stanley study shows that the average emerging country securities market has clearly outperformed the USA so far this year by a margin of 12% gain versus 9% in America.

Markets this morning are continuing their early trends as of 8:45 AM with gold up by about $18, silver ahead by over 40 cents and platinum particularly strong, up by over $50. Copper, zinc and lead are also sharply higher with only nickel lagging among the base metals. In financial markets, the Dow Industrials are off by about 90 points while Canada's TSX, benefiting by the strong mining sector, is slightly higher. Crude oil is off sharply, as is the US Dollar Index.

(All quotes in 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.

← All A Melman Minute