A Melman Minute — April 17, 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!"

An entire new area of metals speculation appears to be opening up, if information that recently appeared in the widely-followed UK Telegraph newspaper is truly indicative of an exciting development in the argument regarding the re-introduction of metals into the world's monetary systems. The subject relates to China's recent aggressive moves in the copper market, moves which many analysts believe are the reason for copper's huge upward price leap from about $1.30 to $2.20 per pound in just the past few months.

What the data implies is that China might be willing to go much further toward their stated goal of holding monetary reserves in some currency - or commodity - other than the U.S. Dollar. According to the Telegraph in two separate articles this morning, China may in fact be making direct investments in copper itself, relying on its universal demand to accomplish a 'storehouse of value' function.

The first article, written by Paul Farrow, is purely factual and details how China has been accumulating copper in a significant manner, "...on a scale that appears to go beyond the usual rebuilding of stocks for commercial reasons...There's even talk of China creating a 'copper standard' for the world's currency system."

The second article is an opinion piece written by Ambrose Evans-Pritchard. After noting that China has been troubled by its interpretation of the future of the U.S. Dollar lists some of the reasons which he believes could underlie China's recent copper activities.

"The beauty of recycling China's surplus into metals instead of U.S. bonds is that it kills so many birds with one stone. It stops the (Chinese) Yuan from rising without provoking complaints about currency manipulation by Washington; metals are easily stored in warehouses, unlike oil; the holdings are likely to rise in value over time since the earth's crust is gradually depleting its accessible ores; and, above all, such a policy safeguards China's industrial revolution, while the West may one day face a supply crisis."

We believe the reasons for China's copper activities will become clearer with the passage of time. What is already apparently, however, is that their actions suggest that talk about reforming the world's present dependence upon the U.S. Dollar as the reserve currency of our planet is more than just idle patter and fully deserves our growing attention.

Gold has traded lower once again and we cannot help but note that the chart of gold's exchange traded fund (ticker symbol: GLD) is beginning to trace out a particularly negative short term trading pattern.

One of our favorite charting texts is William Jiler's "How Charts Can Help You in the Stock Market", which we have found to be applicable to commodities as well. Jiler believed two of the highest odds chart patterns were ascending and descending triangles, the former being bullish and the latter having bearish implications.

As can be seen on the recent chart of gold, the yellow metal has encountered a rapidly declining series of tops since the recent peak near 95 (about $970 spot) and two distinct bottoms at the 85 level (about $865 spot). The formation corresponds closely to Jiler's 'descending top' description, which reads, "...The lower line is a line of support, or demand...As sellers lower their ideas as to the value of the stock, the price works down until support gives way, the price breaks through the lower line, and the formation is completed."

In our opinion, the odds now appear to be tilted in the direction of a short term break to the downside. While this will not disturb existing underlying intermediate and long term uptrends in gold, unless the selling becomes deeper than we now anticipate, even a moderate break to the downside could prove discouraging to metals traders and mining share stockholders.

Perhaps fears of such a possible wave of selling are the underlying reason for recent poor performance in the XAU mining share index, which has also been demonstrating relative weakness of late.

Another factor could easily be fears of continuing deflation in consumer price indexes. We noted yesterday that the annualized rate of visible consumer price inflation in the USA actually turned negative last month and this morning saw a continuation of news headlines which clearly suggest that further economic contraction could easily occur in the weeks and months ahead.

One recently-completed survey of manufacturing activity conducted by the Manufacturers Alliance/MAPI group concluded that the picture continued to look gloomy. Their economist, Don Martin, wrote, "We've never seen anything like this" in describing the consistently gloom responses from manufacturers regarding questions relating to export activity, foreign investments, availability of credit, declining domestic demand and so forth.

We also note that natural gas prices are continuing their steep declines as industrial demand falls further and the United States Energy Information Agency just reported that above-ground storage of natural gas grew by an additional 21 billion cubic feet last week. Recent quotes have descended to the $3.60 per million British Thermal Units (BTUs) where just last summer, quotes were in the $13.00 area. We would also note that declining demand has also been an important factor in Crude Oil's decline from near $147 per barrel to as low as $35 a short while ago.

And so, we continue the recent pattern of growing optimism among many observers that better times indeed lay in front of us thanks to the rescue packages of governments, while, at the same time, the world continues to receive large doses of negative ongoing data.

This morning's trading has featured the decline in gold which, as of about 10:00 AM PDT, had brought the spot price of the yellow metal down to $867, very close to the chart breakdown we noted earlier. Silver is off by about 37 cents while platinum is trading nearly unchanged. Base metals have continued their strong recent rallies, with zinc and lead doing exceptionally well, trading near 69 and 70 cents respectively, in each case those prices being the highest recorded in several months.

Crude oil is once again above $50 per barrel and the Greenback is up sharply against virtually all important currencies.

(All prices 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