A Melman Minute — August 14, 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. The working title of the book will be 'Just a Melman Minute!"

Let's face it. When all is said and done in our evaluations of future prices for gold and silver, by far the greatest determinant is the future role of government. Our analysis of the equation goes something like this: if governments continue to grow, particularly if that growth outstrips the ability to collect legitimate taxation revenues, then all manner of artificial manipulations of the financial system are likely to take place and it is the prospect of those artificial manipulations that ultimately drives the monetary precious metals.

When it seems likely that those manipulations will be growing rapidly into the future and perhaps even moving out of control, the future for gold and silver looks bright. When it appears likely that governments will be able to control expenditures, rein in budgetary deficits and limit new currency creation, the prospects for gold and silver become less favorable. With that in mind, let's take a look at some indications which might allow us to gain some insight into what lies ahead.

America's older cities are dying, or at least decaying rapidly. Ten metropolitan areas have been labeled as "dying cities" by Forbes.com and that number includes such major centers as Cleveland, Detroit and Buffalo. A recent gathering was held in Dayton, Ohio (another of the blighted 'ten') to make plans on how to save those cities from continued decay and to perhaps lure back those former residents who have fled to greener pastures.

Virtually every plan put forward calls for some measure of government assistance, from infrastructure improvements (at federal government expense) to public relations programs to make-work programs for youth. These areas are in desperate trouble and the outlook is almost certainly for more government expenditures to revive them, not less.

Huge programs to improve overall medical care in the USA are on the legislative agenda and budgetary estimates indicate they will add about one trillion dollars to the deficits over the next ten years - and that figure is separate from the tremendous growth in other programs such as Medicare. Even if the government figure is accurate - and our opinion holds that such deficit additions will be much higher - there is likely to be no relief from government growth coming from that area.

The House of Representatives just passed perhaps the most monumental regulatory program in history with a positive vote on the "Clean Air and Safety Act of 2009" which promises the addition of a virtually uncountable number of new bureaucracies and the hiring, over the next few years, of a similarly humongous number of bureaucrats to staff them, all at future government expense. Not only that; but the provisions of the Act, should it attain final Senate ratification, will impose difficulties and restrictions which are almost certain to reduce the efficiency of industry and therefore their profits as well. No relief from potential deficits in that direction either.

Another topic is worthy of note. Governments in the U.S. and the U.K. have begun to participate both financially and in a regulatory manner, in the actual operations of important businesses. America has now established ownership positions in a host of financial corporations as well as auto companies and in the U.K., it was just reported that the government was "loaning" Airbus three hundred forty million Pounds to insure British workers will receive a portion of the jobs involved in the new Airbus 350A airplane. It can be safely assumed that government will continue to 'throw good money after bad' in order to protect their existing investments if those particular companies once again enter a period of severe difficulties.

There is also yet another factor at work. Perhaps the closest thing to the secret of eternal life that humanity will ever construct is the existence of a government program, particularly one where the public comes to believe that such a program is absolutely essential to their self-interest. America has seen that with the existence and growth of the Social Security Administration which now swallows a tremendous portion of taxpayers' revenues and which no politician with an ounce of re-election expectation will ever publicly attack and in Canada and the USA, the same political condition relates to socialized medical care. No politician will ever openly recommend its abandonment if he has the slightest expectation of being returned to office.

In our opinion, this pattern is 'set in stone'. There will be no major retraction in present government programs or plans for a multitude of future costly intrusions, with particular attention being paid to those relating to education or an aging population. We believe there is no way at all to finance these monumental government expenditures with legitimate taxation and, therefore, we can look forward to unlimited growth in government's financing needs in coming months and years.

That, we firmly believe, is the most powerful argument of all regarding the future of the monetary precious metals and why we remain long term bullish on their future.

One of the most widely-watched commodities of all is copper, since it is of vital importance to a number of important industries, such as home construction, automobile manufacturing, plumbing fixtures, cookware, electric wiring, etc. Therefore, when it makes a powerful, decisive move, such a move could have important implications.

As can be seen from the chart, copper rose spectacularly to over $4.10 per pound, fell just as spectacularly to near $1.30, then formed a base and subsequently embarked on a major, new bull market which has seen the price approach the $3.00 per pound level. From an investment point of view, this dramatic price improvement should be beneficial to any junior involved in copper, either via production or exploration. Investors might look to copper mining as a source of potential profits, particularly if the public continues to interpret ongoing economic activity in a positive manner.

Of course, all the 'caveats' published elsewhere on this site certainly apply.

As of 9:10 AM PDT, several of our markets have made sharp reversals this morning. Gold opened moderately higher, touching near $960, but has subsequently dropped to $945 and silver has made a similar retreat, dropping from $15.15 per pound to near $14.70. Base metals opened higher but have sold down; the U.S. Dollar Index opened lower but has turned higher; crude opened higher but has turned lower; and long-term interest rates opened higher but have turned sharply lower. In addition, financial markets in both the USA and Canada opened close to unchanged, but have encountered serious selling with the Dow Industrials now down almost 150 points.

Each of these changes would appear to be in the direction of concern that the "great recovery" may not be all that has been anticipated. Perhaps news over the coming weekend will offer a clearer picture.

(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.

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