A Melman Minute — May 4, 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!"

There is little question that for the moment at least, optimists have gained control of the world's financial markets as exchanges have rallied strongly during the past 24 hours across Asia, Europe and North America. It is also important to note that the latest rallies have now provided strong continuations of recent upside breakouts on stock index charts such as the Dow Jones Industrials.

Ever since the market lows in mid-March, a consensus has been growing that (a) the worst of the economic downturn was now behind us and (b) stimulative moves by the various national and international financial authorities would truly provide the basis for an authentic economic comeback. Reports from various government agencies have indeed taken on a less ominous tone of late and some rays of actual sunshine have appeared.

Two of those occurred this morning with publication of a report from the National Association of Realtors that the number of "pending home sales" rose during March by 3.2% compared to February and was even ahead of the year-earlier figure for March 2008 by 1.2%. This report seemed to confirm recent speculation that an upturn in the battered residential real estate market might be at hand.

The other report was issued by "China Federation of Logistics and Purchasing Agents" Index which showed a sharp rise to 50.1 in April, up from 44.8 in March. According to that index, any reading above '50' is positive. According to 'Marketwatch', one Hong Kong brokerage house suggested that this indication of increasing Chinese manufacturing activity could be a signal of, "...a turning point in the global economic crisis."

It is interesting to speculate what might occur, particularly as it relates to both precious and base metals, should a full-blown economic boom develops during the coming year. While that would obviously improve employment, corporate profits and perhaps even mitigate some of the worst imbalances between government expenditures and revenues, we believe that even a moderate period of strong economic growth would unleash a most unwelcome burst of inflationary pressures.

The most obvious cause would be the syndrome of "more cash chasing fewer goods" as the mountains of newly created currencies generated during the fight to restore economic growth were unleashed into a growing demand for goods and services. In addition, we believe there is another factor which may become increasingly important regarding inflation during the coming months and years. We are referring to the petroleum complex.

While it is certainly true that this segment had a huge 'fall from grace' during the last half of 2008, there is no question in our minds that the supply/demand equation for worldwide petroleum consumption versus production remains precarious at best over the long term and, if strong economic growth implying rapid increases in petroleum product consumption does indeed take place, upward price pressures for crude, gasoline, heating oil and even natural gas could begin to occur.

In fact, upward price pressures have already begun to fdevelop within the gasoline market as prices have fully doubled from their lows of $0.75 last December to slightly above $1.50 at present - and that move has taken place during a period of sharp economic contraction. It is also worth noting that during the same period of time, the price of Crude Oil has risen from just above $32 per barrel to over $53 this morning. While these prices are still far below the trading peaks of last summer, they are also far above the historic averages for the past several years.

One of our main concerns regarding future supply has to do with the sudden and sharp decline in new exploration, particularly in North America (both onshore and offshore) which has occurred during the past year. An excellent indictor of petroleum exploration is the number of drilling rigs in operation. The number peaked last year at about 2,000 and has been declining steadily since and, as of May 1, the number of rigs in operation had fallen to 1012.

We also cannot help but note that development of the enormous Alberta tar sands has also slowed substantially due to both lower product prices and the vigorous activities of the environmental community whose apparent goal is to shut down such operations in their entirety.

Without new product coming on-steam and with almost complete reliance on existing oil fields, many with questionable reserves, we believe that a sudden and unexpectedly large spike upward in petroleum complex prices could occur should solid economic expansion, carrying with it the implication of rising consumer demands, truly get underway. In our opinion, should this occur, the precious metals group could benefit in a substantial manner. We also believe that rising inflation could put yet additional pressures on the pricing of government debt instruments, which have already begin to come under such pressures.

One last note is worth discussing. One of our themes of late has been that governments are becoming desperate to raise revenues and, therefore, tax increases are being either suggested or enacted in ever-increasing numbers. Today is no exception as we note as Mayor Blumberg of the City of New York just announced he is seeking an increase in that city's sales tax rate and President Obama just declared open season on offshore tax avoidance schemes, also announcing that he intends to add an additional 800 revenue agents for that purpose.

As of 9:30 AM PDT, financial markets continue on the plus side with the Dow Industrials ahead by around 150 points and Canada's TSX is up by more than 200. Gold has advanced strongly to about $905, silver is ahead by more than 50 cents and the base metals are up on balance, with copper once again leading the way. Mining share indexes are up by about 4%, crude has gained nearly 50 cents per barrel and the U.S. Dollar is slightly weaker in currency markets.

(All prices US Dollars 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