A Melman Minute — May 20, 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!"

Well, California voters had their say yesterday and what they said was a resounding "NO!" Their message was simply 'no' to new taxes, 'no' to wild spending and, 'no' to the unrealistic plans being foisted on them by irresponsible legislators. All five propositions designed to raise revenues to enable spending close to present levels were trounced and, with yet another message that came through loud and clear, proposition 1F, which called for the freezing of state elected officials' salaries in 'bad years', won with a resounding plurality.

Of course, this leaves the State of California in a tremendous bind, since their budgetary shortfall for this year alone has now been estimated at an enormous $21.3 billion and Governor Schwarzenegger has threatened an array of measures to reduce spending, some of them cutting close to the bone by including reductions in education spending, laying off public service employees, releasing huge numbers of convicts from prisons and slicing deep into health and social service programs.

(As an aside, we wonder, however, why proposed reductions never seem to take the form of reducing regulatory bodies, reducing highly-paid management positions or cutting back on the number of committees and investigatory commissions - all laden with 'plum' political appointment? Nope, the only items that seem to be eligible for cuts are those which will scare the voters the most. Strange, isn't it?)

However, there is one factor which all deny, but which remains the "elephant in the room" which no one wants to discuss. That factor, which also applies to other troubled states such as New York which is also descending into a pit of budgetary hell, is that a rescue wagon driven by Obama, Bernanke, Pelosi, Reid, et al will soon be riding to the rescue with unlimited federal monies and loan guarantees. In any case, a series of new emergency meetings are now being held in Sacramento to determine the next steps to take in this crisis.

Our initial consideration is that heightened levels of crisis usually work to gold's advantage and, coincidence or not, the yellow metal has been turning in a powerful performance so far this morning. As can be seen on the chart, the gold ETF has now moved to the highest level since late March and is close to breaking above the mid-March peak when spot gold hit the $965 area.

Clearly, gold is in a rising pattern with only the two important peaks near spot $1,005 and $1,035 left to exceed before historic new highs are attained.

One of the factors which be believe is driving gold higher is that signs of economic improvement are growing, at least for the short term. However, that same consideration is having an unwanted side effect, namely sudden and impressive gains in the prices for a variety of raw materials, including base metals, precious metals, food stuffs and even lumber. These rising prices are also having the effect of driving the U.S. Dollar to the downside.

The Greenback fell sharply in currency trading around the world today, and the DX Index, which measures the U.S. Dollar against other major international currencies, has plunged today to its lowest level since very early this year and a clear pattern of 'descending tops' has emerged. We consider the appearance of this chart to be an important consideration regarding gold's strength for two fundamental reasons.

In the first case, since gold is the counter-measure of dollar stability, any weakness in the Greenback usually works to gold's advantage.

Secondly, as the American Dollar falls, the price of all imported goods - and America imports staggering quantities of oil, manufactured items, entertainment units, etc. - should show a commensurate rise, and that would then impact market prices to the upside, thereby providing a basis for the anticipation of rising future rates of inflation - a factor which historically has been one of the prime drivers in past golden bull markets.

Of those imported items, none has as powerful an impact on the USA's Balance of Trade deficit as petroleum and virtually all the components of the petroleum complex have now risen substantially from their lows of last December. Heating oil is up from about $1.10 to $1.55; crude oil has gone from $33 to $62; and Unleaded Gasoline has exploded upward from the area of 77 cents per gallon to $1.85 (or higher) this morning. The net effect of these increases will likely to drive the cost of living higher for millions around the world, just when so many are drowning under a sea of economic calamities.

One last news item also caught our eyes and that was a story on "Marketwatch" which informed readers that, "...Gold investment demand in the first quarter more than tripled from a year ago to a record level as investors piled into gold exchange-traded funds..." The article also informed us that high gold prices have led to increasing levels of supply generated from recycling and that has put a curb on the gold price rally so far.

We would ask one question, and it is this: "What will happen to prices should investor demand continue to rise while recycling supply reaches a peak and begins to fall?" In our opinion, the answer to that question is obvious - namely prices will move higher over time.

Financial markets this morning have turned in a mixed performance. The Dow Industrials opened sharply higher by about 110 points, but by 9:45 AM PDT they had fallen back to about unchanged. However, Canada's TSX Index, responding to higher natural resource prices and US Dollar weakness, has been much stronger and is presently ahead by about 170 points. Gold has traded above $940 this morning while silver and platinum are also moderately higher, near $14.25 and $1,145 per ounce respectively. Base metals are mixed so far today with copper and nickel moving to the plus side while zinc and lead are somewhat lower.

Both major mining share indexes have posted strong gains of 4-5%, the U.S. Dollar continues lower and Crude Oil is holding on to most of its gains, now trading near $62.00 per barrel.

(All quotes 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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