A Melman Minute — April 16, 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!"

Financial markets, which had been demonstrating growing levels of optimism that government stimulation measures would bring about an early expansion of the economy, received a bit of a jolt early this morning when two numbers relating to real estate turned out to be profoundly negative.

Housing Starts for March dropped sharply to a seasonally-adjusted annual rate of 510,000, far below expectations and a sharp decline from February's modest gains. This was the second lowest rate since the 1940s and was markedly below the 550,000 consensus figure of economists. New Building Permits, a solid indicator of future building activity, also fell during March, dropping to an annual rate of 513,000 and single-family permits descended to just 361,000, their second lowest number in six decades. Taken together, these two reports make it difficult to foresee any robust activity in America's housing construction industry - and from its allied trades and suppliers - for months to come.

In addition to the poor housing starts and permit information, data released this morning also showed that the number of homes in active foreclosure proceedings continues to expand. March's figure rose to 340,000 nationwide in America, up a huge 17% from February.

These news items had an immediate effect on several markets as an early 45-point rally in the Dow Industrials quickly transformed into a 30 point loss; gold fell back sharply on indications of a slowing economy; and the long-term bond market turned weaker, perhaps out of fears that this new evidence of continuing economic declines raised fears of additional money creation.

We would point out that while an observer might expect gold to rally on expectations of further monetary creation, we believe it is clear that the majority of market participants have not yet translated today's Fed actions into future accelerating inflation and therefore have not taken significant positions inside the gold and silver umbrella of investments.

As has been the case for many months, there was another fresh spate of negative economic news, perhaps led by information that one of the world's largest shopping center operators, General Growth Properties, Inc., has finally filed for bankruptcy following many months of such rumors. Their revenue stream had declined to the point where it became impossible to pay interest due on debt in a timely manner and creditors finally forced their hands. Although the shopping centers they control will continue to operate, the wipeout of shareholders - and the subsequent reduction in overall consumer equity, has been enormous, as can be seen from their chart.

Unfortunately, GGP is simply one example among many such previously 'safe and secure' corporations which have encountered dramatic reversals in their fortunes, and many of these reversals have wiped out tens of billions of dollars worth of shareholder equity.

It seems that this economic contraction, which began with a direct hit on real estate values and then spread to the world of credit and banking, keeps enveloping new areas as consumers continue to pull in their spending horns. One of those segments most recently suffering hits is the airline transportation field and one of their stalwarts, Southwest Airlines, just announced a $91 million loss for the First Quarter 2009. Southwest had previously been one of the most consistently profitable American carriers and their descent into losses appears to be particularly ominous.

As it relates to gold and the other precious metals, we believe that such losses will almost certainly compel the American government to continue its aggressive money-creation policies, especially considering one of their most palpable fears is an overall decline into deflation.

Speaking of possible deflation, Justin Lahart wrote a piece in this morning's Wall Street Journal citing a speech given in 2002 by present Fed Chief Bernanke entitled, "Deflation: Making Sure it Doesn't Happen Here." Of course, at the time he made that presentation, the potential for a deflationary episode was barely even mentioned.

That is no longer the case as just this morning the Labor Department reported that for the first time in more than one-half century the annualized rate of inflation when a single month - in this case March 2009 - showed an actual decline when compared to its year-earlier counterpart. As Lahart explains, "...but now consumers are on a diet; and it is hard to imagine them returning to their former spendthrift ways anytime soon. That leaves anyone in the business of selling goods and services to Americans in a bind. To stay afloat, they will all compete harder for sales that are left. Stiffer competition makes for lower prices." (our emphasis)

He then added, "Amid continuing credit woes, a protracted spell of deflation would be particularly unwelcome. Falling prices would make it tougher for borrowers to pay off debt, leading to ever more defaults (see General Growth Properties above - LMM) and even tougher lending standards. Mr. Bernanke knows this and if fighting back. One of the deflation-fighting measures the Federal Reserve chief outlined in his 2002 speech was that the government could ramp up spending or lower taxes, and the Fed could buy up the Treasuries issued to finance such moves."

The public cannot ever claim that they weren't warned about today's series of actions well in advance.

As of 9:15 AM PDT, financial markets in Canada and the USA are hovering close to unchanged after first rallying, then encountering heavy selling. Precious metals are sharply lower with gold off by $12, silver down 50 cents and platinum off by about $5.00. Base metals, however, are continuing to add to previous gains of the past few days with copper hitting an intra-day high near $2.20 per pound, nickel near $5.70 and both zinc and lead touching about 67 cents. All are far above the low levels of recent months. (All quotes US$ unless otherwise noted.)

Despite these gains in the base metals, both major mining share indexes, HUI and ZAU, are down about four percent this morning. Crude oil has traded steadily just under $50 per barrel and the U.S. Dollar is slightly stronger in currency markets.

NOTE: Our apologies for not publishing a "Melman Minute" yesterday according to our normal schedule. Unfortunately, our area Internet provider was down for many hours leaving us in the lurch.

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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