A Melman Minute — April 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!"

One of the most important gold stories in years is beginning to unfold, a development which we believe could have profound - and positive - implications for the future price of the yellow metal. As of this past Friday, China has announced that they are increasing their holdings of gold. Specifically, the state-run news agency, Xinhua, noted, "...Hu Xiaolian, the head of China's foreign-exchange agency, says that China's gold reserves had risen by 454 metric tonnes since 2003 to 1,054 tonnes." Earlier outside estimates had pegged China's gold stock at only 600 tonnes.

The Wall Street Journal added, "...China's announcement confirmed widespread expectations that the country had been increasing its gold reserves..."

There is also another potential impact to the story. The International Monetary Fund (IMF) recently announced that it planned to sell almost thirteen million ounces of gold to establish a fund for promoting the economies of poor nations. Quite surprisingly, that announcement did not send prices crashing as might have been expected and we are now hearing speculation that China is prepared to become a major player on the 'buy' side at any such IMF actions.

China's announcement of their increased gold holdings also adding fuel to the speculation that they may be planning some sort of move out of the United States dollar for their immense foreign reserve holdings, and, by implication, gold may be a part of those plans, should such a move take place.

In our opinion, while nothing relating to gold becoming an integral part of the international monetary system has been proved as yet, any increase in speculation toward that direction could serve to drive gold higher.

As noted earlier, one of our major concerns for society in general and the mining industry in particular is the clearly growing influence of the political left, and we believe that one negative (for mining) potential result of such influence would be a substantial, perhaps dramatic increase in both environmental and aboriginal regulations which could have a direct and negative impact on the junior mining sector.

Election results in Iceland would appear to confirm such fears. After 70 years of continuous rule by the conservative Independence Party, Icelandic voters have elected a leftist coalition to run that nation for the first time since they earned their independence in 1944. Election analysts noted that the election result may have been a backlash against what many regard as laissez-faire capitalism's failures. Another undoubted influence was the IMF's recent prediction that Iceland's economy would shrink by ten percent in the coming year, their steepest slump ever.

It is our opinion that there has been a concerted effort by many around the world to blame "unfettered capitalism" for the world's economic problems and, therefore, there is a concomitant rush to replace free markets with state-dominated ones.

"They (Obama Administration) have a goal...and he's very open about it. They are going to grow this government." (our emphasis)

"Spending and deficits are both heading skyward, and government debt held by the public is heading toward 80% of GDP."

In regard to American health care, Mr. Carey pulled no punches. He believes that health care insurance will become completely nationalized, and that the wheels of action toward that goal have already been set in motion. "That's the scenario you're going to see if you have a public plan for insurance that competes with private plans...They've tilted the playing field back and now they're going to wipe out the private plans in their budget."

On a political note, he believes that the Obama people are misreading the will of the American people and may be going too far in their drive toward socialism. He noted, "...I don't think the American people want unilateral government control over the entire health-care system...That, together with the runaway spending and growing pile of debt, could yet set the stage for a Republican comeback, and sooner than most pundits would predict."

In the meantime, an array of problems continues to grow, not the least of which is the impact of the new strain of swine flu which is impacting Mexico very hard with an estimated 100+ deaths already recorded. Social activities including church services and sports events have been curtailed, and fears of possible epidemic are working their way around the world.

Yet another potentially serious dilemma is the continued decline in the financial structure of New York City, home to many of the world's most important financial institutions. The latest threat relates directly toward their subway system which carries hundreds of thousands of workers into and out of Manhattan each day. The system is facing a cash flow shortage of some $2 billion this year - excluding any additional costs of maintenance - and the only avenues to raise the funds appear to be increasing fares dramatically or ordering substantial cuts in service - both of which could negatively impact the functioning of the metropolitan area.

Markets this morning are continuing their pattern of late, namely acknowledging problems by selling off early, and then rallying to recover some of those losses or even post net gains. After opening about 80 points to the downside, the Dow Industrials had moved to a gain of 40 points by 9:10 AM PDT. Canada's TSX has also improved sharply, changing an early sharp sell-off of almost 200 points into a modest loss of about 50.

Gold and silver are close to unchanged near $910 and $13.00 per ounce respectively, but platinum, like the base metals, has been hit by selling and is down by about $30.00 while the base metals are down moderately on average. Crude has fallen back to the $50.00 per barrel area, mining share indexes are close to unchanged and the U.S. dollar is slightly higher in currency trading.

(All quote US$ unless otherwise indicated.)

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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