A Melman Minute — December 10, 2010

Well, it appears that a spate of good economic news it making its appearance once again, at least for the short term and this collection is having some clear effects on various markets. A little later we speculate on what could develop into an important political trend, one which might merit our close attention.

If the economy is indeed recovering, it might be expected that the demand for credit will increase, putting upward pressure on interest rates and, conversely, downward pressure on interest rates futures. As can be clearly seen in the chart of the March 2011 futures contract for 30-year US Treasury bonds, that downward pressure has been gathering force for some time.

An economy which is forecast to grow is also likely to result in increasing demands for raw materials, specifically including base metals. This concept is confirmed when we look at the weekly chart for "High Grade Copper" and note that the price is now above $4.10 per pound for only the second time in history and is now within just a few pennies of its historic high in the spring of 2008.

There have indeed been some glimmers of improving economic performance over the past few weeks in both Canada and the USA. For example, Canada Mortgage and Housing Corp. reported that housing starts in Canada had soared by 11.6% in November, with most of the gain coming from the country's most populous province, Ontario. Canada's National Post newspaper quoted TD bank economists as noting, "The modest rise in the single-family home sector along with the multi-family units are in line with the "mini-renaissance" in Canadian housing demand, driven by low borrowing rates."

There has also been a degree of optimism generated by the recent tax proposals extending the Bush-era reductions to the entire spectrum of taxpayers, particularly including those earning above $200,000 per year who had been scheduled to have their income taxes undergo a dramatic increase. The feeling that these tax reductions will stimulate further economic activity is now being widely accepted.

We also note that there has been an increase in advertised job openings in America with that number now hitting a four-year high. This type of data could be indicative of a turnaround in the woeful unemployment data of late and is yet another reason for growing optimism and that change was highlighted by another improvement in consumer sentiment as the Thomson Reuters/University of Michigan Consumer Confidence Index for early December rose to 74.2, up from 71.6 in November. However, before anyone gets too excited, it must be noted that the number itself is deeply negative and remains below the lowest numbers encountered during the last recession of 2001.

One other piece of positive economic data was a report from the U.S. Department of Commerce that the Balance of Trade for November improved from October's deficit of about $44 billion to a November figure near $38 billion.

Whether these and other items of positive news are truly indicative of a genuine turn in the economic winds is yet to be seen, but at least for the moment, they are having some clear effects on markets and on the precious metals group in particular. As optimism has improved, some selling in gold and silver continues to take place; nothing dramatic, but indeed noticeable.

In the "are you pulling our leg?" department, we must include a recent comment from the socialist Bolivian government regarding mining activity within their ultra-regulated country. A Reuters report leads off with this comment: "Bolivia's leftist government said Wednesday it will respect mining companies' rights in new operating contracts that must be drawn up after the country ended all private mining concessions last week." We are told that the country has largely nationalized the mining, telecommunications, electrical power, forestry and public utility sectors in the past, but going forward, the country's V. P., Alvaro Garcia, was quoted as saying that miners, "...have nothing to worry about. Nothing will be prohibited...All rights of investors will be maintained."

Yeah, sure. In our opinion, anyone who believes such assurances from a notoriously anti-free enterprise government, after they have taken one punitive measure after another against resource developers for years, should stand in line to buy that proverbial bridge in Brooklyn.

POLITICAL ANALYSIS

We strive here at "The Melman Report" to be as apolitical as possible, but occasionally we read an article which opens our eyes to the possible development of a movement which, if continued, could lead to a substantial change in the government of America and, most importantly to us, to a commensurate change in the outlook for our world of metals mining. One such article was an excerpt from Sarah Palin's new book, "America By Heart", carried in yesterday's National Post and, I would presume, in many other publications in Canada and the USA. After reading this excerpt, two conclusions came to mind. First, Palin is no intellectual lightweight. Second, her strong declaration of positive American themes could take her to the Republican nomination for President in 2012 and even to a Presidential Inauguration in early 2013.

In the excerpt, she makes it clear that in her mind, America is and has always been truly exceptional in the most positive sense. She lets you know, without a single doubt, that America should be honored, not dishonored by her leaders. In fact, reading her words is very much like listening to the speeches of Ronald Reagan, who always described America as a "Shining city on a hill."

It was my pleasure to live in America from 1962 through 1996 and I vividly recall the chortling of Democratic leaders when the Republican presidential nomination was handed to Ronald Reagan. They were delighted that such an 'intellectually inferior' actor was to be their opponent. Boy, were they in for the shock of their lives as Reagan trounced their 'intellectual heavyweight', Jimmy Carter, by an Electoral College margin of 489-49 and went on in 1984 to hammer Walter Mondale by an ever grater margin, 525-13, the greatest such margin in history. (As a comparison, Obama's 'landslide' victory margin over McCain in 2008 was 365-173.)

What set Reagan apart was his evident love for America and his incredible pride in being an American. There was no Obama-style apologizing for his country - ever. And Americans loved him for his passionate belief in the concept that America was, in his eyes, the "Land of the Free and Home of the Brave." He also made it clear he strongly believed in less government, greater individual responsibility and free enterprise - all of which resonated with the American electorate by a resounding margin.

I could not help but detect the same messages in Palin's book excerpts and I cannot help but wonder if she could indeed be the rallying point for many Americans who are ready to support a politician who truly stands behind the historic concepts which, in their eyes, made America great.

The consequences for the precious metals, if that scenario plays out, might not be positive, as was the dramatic case in the years following Reagan's ascendancy.

This entire idea is still in our earliest stages of consideration, but could easily bear watching in coming weeks and months.

Most markets this morning are making relatively small moves and, as of 10:30 AM PDT, gold and silver are off moderately after recovering from earlier selling; base metals are up slightly on balance; mining share indexes are close to unchanged as is the US Dollar in currency trading. Financial markets are a bit stronger in Canada and the USA with the TSX Index up by about 55 points while the Dow is up by about 20. Crude oil is selling down to about $87.50 and long-term interest rates have moved higher.

All quotes US$ unless otherwise indicated.

Next Melman Minute scheduled for Monday, December 13, 2010.

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