A Melman Minute — May 1, 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!"

We have been noticing an interesting pattern of late which, while political, may also have consequences for the mining industry. We are referring to the pattern of using various crises to increase regulatory growth and interference. Four examples come to mind.

1 - For two years now, we have been told that there is a terrible 'crisis' about to burst upon mankind, the crisis related to "Global Warming" or "Climate Change." According to proponents of those scenarios, events such as immense global flooding or searing heat waves are about inflict themselves upon mankind in an uncontrollable manner unless lawmakers quickly pass draconian regulatory measures.

2 - Since mid-2008, we have been told we are now in a financial 'crisis' and the only answer is the creation of a worldwide monetary governing body with authority to issue binding regulations which must be obeyed by the various important economic nations of the world.

3 - On a lesser scale, but still within the same principal, we are now told there is a 'crisis' of drug usage in international athletic competitions and the answer must be the establishment of a worldwide authoritative body to create a series of new regulations which will be binding for all international competitions.

4 - During these past few days, we have been told there is a huge 'crisis' at hand due to the suddenly rampant 'swine flu' epidemic and, not surprisingly, there is already talk about the immediate formation of an international health regulatory body with the authority to issue binding regulations which all countries must obey.

It is this last crisis that is having an immediate effect on the world of junior mining companies. First, travel regulations are being proposed which will make it more difficult for management to travel to operational sites. Of even greater immediate importance, we have just learned through a press release from New Gold Inc. that authorities in Mexico have just ordered a five-day closure of, "...all 'non-essential' activities throughout the country." New Gold will be closing their open pit mining operations from today through May 5 and it must be assumed that other mining companies will also obey this regulation.

One cannot help but wonder just where this frenzy to regulate will lead. Could there, for example, be a future international agency which will decide that mining is an 'environmentally dangerous' industry that should be permitted to operate only when a demonstrated need for the product can be proven to that agency's satisfaction? And how would our present free meeting of metals demand versus suppliers continue under such an agency?

These questions may not be as far-fetched in the future as they sound today, given the power of this new trend toward expanding international regulatory bodies.

One of our favorite charts, the TYX Index of U.S. 30-year government bond interest rates, has taken a sudden turn of late. After spending many weeks inside a trading range between approximately 3.4% and 3.8%, the index has suddenly soared to the 4.2% area. What is of great significance to us is that this upward move in long-term interest rates has taken place despite overwhelming actions by the U.S. financial authorities to force interest rates lower.

What is perhaps even more surprising is that despite this upward and seemingly unwelcome turn of interest rates, the general financial markets have been showing renewed strength with the Dow Industrials reaching the highest levels in more than three months.

It is difficult to reconcile the two trends. Presumably, the financial markets are rising in anticipation of improving business conditions. However, it would seem that nothing could serve to restrain optimism regarding future business improvements as effectively as rising rates which would put renewed pressure on real estate prices, auto sales and other important industrial and commercial long-term financial arrangements.

As we have noted previously, the implications for the world of precious metals could be very important. If free market forces continue to create the conditions for rising rates due to the open market sales of existing bonds (based, we believe, on fears of future inflation which would diminish buying power), then it appears likely, in our opinion, that the various governments, most particularly including that of the USA, could be forced to accelerate their programs of stimulation, with a resultant even more rapid increase in debt, currency creation and market interference than we have seen to date.

We believe that should such actions take place, they could truly increase the odds of a frightening future round of hyperinflation of the U.S. Dollar. That, in turn, could spark a rush toward the precious metals for purchasing power protection.

Myra P. Saefong, writing out of Tokyo for the website "Marketwatch", addressed this question today in an oblique way when she questioned whether such considerations lay behind the recent admission by China that they have been increasing their hoard of gold, rather than selling as other central banks have been doing. Seafong quotes Michael Kosares, President of Centennial Precious Metals, as noting, "...China, true to its reputation for patience and steady, long-term progress toward its goals, has taken the golden path and now they want the world to know about it." Saefong then pointed out that China had requested that the IMF sell its gold hoard and she asked noted mining speaker Peter Grandich why China would encourage sales which might reduce the yellow metal's price and Grandich replied, "So it can buy more."

These are indeed signs that we have entered an unusual period for the world's overall financial systems. It will be most interesting to see how it all plays out, but we will stand by our prediction that the year 2009 will go down as one when truly historic changes took place.

Markets this morning are relatively quiet and, as of 9:15 AM PDT, financial markets were mixed with the Dow Industrials close to unchanged while Canada's TSX Index was up by about 125 points. Precious metals were trading quietly; mining share indexes were slightly higher; but base metals were showing strong gains across the board. Crude oil was up to near US$53.00 and the Greenback was slightly weaker in currency trading.

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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