A Melman Minute
| By | Leonard Melman |
|---|
We have just returned from the exceptionally well-attended Cambridge House Resource Conference held in Vancouver, B.C. this past Sunday-Monday as well as the "Round-up" conference, also held in Vancouver in the same time period. The Cambridge House conference was focused almost entirely on the outlook for the metals and the companies which explore for them or produce them while the Round-Up gathering was aimed more directly at those providing all the essential supporting services and products for the industry.
Both groups now share a common concern, namely whether the recent contractions in the prices for both precious and base metals - and their associated shares - are corrections within ongoing bull markets or if they are the start of something much more damaging, such as the retrenchment of the magnitude we saw during 2008.
One look at the XAU share price index clearly demonstrates that there has indeed been a downturn of some severity. However, we can offer the observation that in our opinion, good chart support appears in the "190" area near previous peaks and no long-term trendlines have yet been violated.
The great question to consider is just why the metals have encountered a serious bout of selling, particularly in light of the fact that many observers are predicting strong economic growth which would normally suggest growing demand and, therefore, rising price pressures. However, there is another side to the question.
It is our belief at TMR that many "experts" hold the view that if solid prosperity returns, inflows into government coffers will increase to the point that all the extraordinary financial measures of the past three years will no longer be required and that various governments will be able to generate substantial surpluses which may even enable them to actually repay the mountains of debt which now plague their balance sheets.
There is no doubt that many now believe that solid prosperity is on the way and one piece of evidence is the rallies in conventional securities markets, as evidenced by the chart on the Dow Jones Industrial Average, appended below.
As might be noted, the Dow Industrials have rallied over the past few months from near 10,000 to today's high near 12,000 with only one modest correction along the way. The question remains whether that average will continue on to new heights, perhaps even breaking into all-time highs above the previous record near 14,200 - or whether this is a powerful, but limited rally which will peter out below that previous high and be followed by a renewed and perhaps powerful decline. Regarding the metals, the question is of some substantive importance because of the historic contra-cyclical nature of the precious metals markets to the financial indexes.
There is little question that optimism regarding the general economy is growing rapidly. Reporting from Davos, Switzerland where many of the world's leading economists are gathered, Terrence Corcoran just reported in the Financial Post, "...The world may be on the brink of a major outbreak of growth and wealth creation. The prospect of a bright global economic future filled with expanding trade, innovation, production and income distribution received a boost Monday when Bloomberg News reported that several economists attending the annual Davos 'gabathon' were forecasting a major long-term growth cycle."
In fact, many attendees were forecasting a renewed "super-cycle" of economic growth which might last several decades. Nobel prize winner Edwards Prescott went so far as to publish these thoughts: "The whole world's going to be rich by the end of this century...The integration of China, India, and other developing countries into an increasingly globalized economy will generate commerce and investment, spreading wealth everywhere."
It is our believe that to the extent that the many people are beginning to believe such thoughts, specifically a world of non-inflationary prosperity where mountains of debt will evaporate under an irresistible Utopia, then the holding of gold, silver, platinum, etc. for purely insurance purposes will become unnecessary.
That is the kind of thinking we are beginning to hear and President Obama's "State of the Union Address" last night contained much of the same kind of thinking, namely that if we only pulled together and all partisan interests could be set aside, then, almost as an inevitability, prosperity and stability would be achieved.
.Unfortunately, we must resume these musings in a special "Melmania" report on Obama's address which we intend to post on this site tomorrow morning, time permitting as we must depart on Friday evening for Paraguay to report on a uranium mining venture which is now under active exploration and development . However, the matter is sufficiently important to give it our utmost attention.
As of 10:15 AM PST, markets this morning are continuing their recent trends. Precious metals are once again heading lower with gold having touched as low as $1,324 before rallying to the low $1,330's and silver bottomed near $26.70 before rebounding to about $27.20. Base metals have moved higher on brightening economic expectations and mining share indexes have suddenly moved higher on the session by about 1.5%. Crude oil has advanced by about $1.00 per barrel, long-term interest rates are moving slightly higher and the U.S. Dollar Index has once again dropped below the '78' level.
In financial markets, Canada's TSX Index has rebounded sharply by about 100 points on improving performance among resource stocks while the Dow Industrials are up by about 25 points.
All quotes US$ unless otherwise indicated.
We plan to post a special "Melmania" report tomorrow on the implications of President Obama's address of last night as well as a regular "Melman Minute" on Friday, January 28, 2011.