A Melman Minute — January 14, 2011

NOTE: Mr. Melman will be speaking at the upcoming Cambridge House Resource Conference scheduled for Sunday-Monday, January 23-24 in Vancouver, BC. He will be appearing in a panel discussion on gold and silver Sunday morning at 8:30 AM in Speaker Hall 2 and will be presenting a paper on the relationship of Quantitative Easing to the world of the monetary precious metals Monday at 3:30 PM in Workshop 2. This exhibition is described as the world's largest of its nature and with over 400 mining companies exhibiting, it will be a rare opportunity for the mining share investor to gain important information. Convention information can be obtained at www.cambridgehouse.com

Well, we are now two weeks into the new year of 2011 and, at least for the moment, there appears to be a lull in the announcement of important international financial events. While we have indeed been receiving word of one natural catastrophe after another such as the Australian and Brazilian floods, as well as man-made calamities like as the Arizona shootings, there have been few government policy pronouncements of an earth-shaking nature during the past two weeks.

However, one story of a different sort which we believe may directly affect government policies in the future is gaining traction. We are referring to the ever-widening concern regarding present and future food price inflation.

We have recently carried charts of wheat, corn and soybeans showing these grain commodities are now either at or approaching their highest levels in almost three years and the United Nations just released a detailed report regarding actual or potential food price inflation. The U.S. government followed closely with information of their own forecasting this year's harvests would be below expectation and, therefore, the margin of excess "stocks-over-demand" would fall precipitously to the lowest level in years. Now the major financial media is picking up this theme as the prestigious Financial Times has devoted considerable space to the topic.

In a story headlined, "Forecasts deepen fears of food crisis", the FT reported, "Agricultural commodity prices leapt after the US government surprised traders by cutting stock forecasts for key crops, putting the world a step closer to a new food crisis." They also detailed how food inflation is becoming a major concern in the world's two most populous nations, China and India.

What concerned them most was the diminishing margin of safety in excess food stocks, reporting, "...the ratio of global stocks-to-demand would fall this year to levels not seen since the mid 1970s..."

In a separate column by financial analyst David Pilling, we learn that, "...In China, too, higher food prices are feeding inflation, which scaled 5 percent in November, well above the official 3% target...Beyond the immediate inflationary anxieties, the real question is whether high food prices are here to stay..." (our emphasis)

England's "The Telegraph" newspaper also acknowledged the same problem in a story entitled, "How commodity prices are driving up the cost of U,K, food" and they summed up the reasons for upward pressure on food prices as being caused by, "...the high price of oil used in transporting almost every commodity in the world and the manufacture of fertilizer needed to grow crops. A weak dollar, bouncing equities, speculation and global monetary easing are some of the reasons..."

With all the talk of food inflation, crude oil approaching $100 per barrel and further projected serious difficulties for the European Economic Community, one would have normally expected the precious metals to be moving higher, but over the past few days and weeks that has not been the case and this morning selling in both gold and silver has been particularly severe with gold down about $30 to the upper $1,350s and silver down almost $0.60 per ounce to near $28.15.

The big question, of course, is whether this selling constitutes a major trend reversal or whether it is more typical of the type of correction which normally occurs within any ongoing bull move. When we look at the five-year, longer term charts for both gold and silver, we note that this type of correction is not at all unusual and, in fact, since 2005, gold has endured no less than seven different corrections of over $100 each.

Silver's chart has a somewhat different appearance with the most bullish action taking place within the past two years, but even with that consideration, the recent declines do not appear to have reversed the major market trend.

In other markets, as of 9:00 AM PST, financial markets in America have recovered from earlier declines and the Dow Industrials are now ahead by about 20 points while Canada's TSX, which is more heavily weighted with mining shares, is close to unchanged. Base metals are trading slightly higher on balance but mining share indexes are down by about two percent. Crude oil is off to just under $91 per barrel, the US Dollar is close to unchanged and interest rates are also trading quietly.

One last note: every so often we find a quote that expresses thoughts which confirm our own and are expressed so clearly that they are a joy to behold. One such comment was just offered by another FT columnist, Kenneth Rogoff. While writing a piece on the Euro and other currencies, he wrote this gem: "All the major regions remain trapped in post-crisis macroeconomics strategies that are either inconsistent, incoherent or both. US government policy is deliciously contradictory, cutting taxes while promising to balance the budget later, expanding entitlements while vowing to rein them in later. And because the dollar is so popular, the US is being sure to print lots...All in all, 2011 is shaping up as a RACE TO THE BOTTOM for currency values."

Thank you, Kenneth. It's good to know we're not alone.

All quotes US$ unless otherwise indicated.

Next Melman Minute scheduled for Monday, January 17, 2011.

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