A Melman Minute — April 1, 2011

FLASH BULLETIN Dow Industrials Climb to New Multi-Year High This Morning!

Yes, indeed, this is April Fools Day but the above headline is no joke as North American financial markets are continuing along the path of ignoring all the actual and potential calamities that seem to be occurring worldwide in such abundance. This kind of action does remind us that one of the stock markets oldest adages is Bull markets climb a wall of worry meaning that if a bull trend is underway, optimism regarding the future can enable investment markets to overcome any present-day gloominess.

In any case, the five-year chart of the Dow Industrials clearly indicates that the bull rally from the depths of March, 2009 remains intact and also, the distance between present quotes on the DJI and the penultimate high near 14,200 in 2007 continues to shrink.

From our point of view, during the past two years in particular, there has been a historic non-confirmation between the golds price and that of financial market indexes.

When we look at golds action from March, 2009 onward, a strange tale emerges. At the same time the Dow has rallied from 6,700 to 12,400, gold has rallied from approximately $850 per ounce to well over $1,400!

We can see just how remarkably inconsistent this recent comparative action has been when we examine historic precedent established since gold became an actively traded commodity. From 1971 through 1974, while the financial markets as measured by the Dow Industrials were plummeting from their previous all-time high above 1,100 to under 600, gold powered ahead in its first full-scale bull market, rallying from under $60 per ounce to almost exactly $200 per ounce a gain of over 233%. Then, from 1977 through January, 1980, while gold roared to its then all-time high above $800 per ounce, the Dow floundered near the 800 level and the day actually arrived when the price of gold exceeded the quote on the Dow Industrials!

All of this suggests that the comparative market action between the Dow and gold since March, 2009 is a giant non-confirmation, and, in our experience, non-confirmations of this magnitude indicate a major change in direction is in the offing. We at The Melman Report believe we will see either of two future movements:

A The gold market will become the true indicator, meaning gold will continue along its bullish path while the financial markets walk off a cliff, or

B the Dow Industrials will become the true indicator, meaning the Dow will continue to rally and gold will enter a period of serious decline.

In our opinion, given the overall financial difficulties now facing the world, A would appear to be the more likely alternative.

We shall see.

One of those major financial difficulties we noted above is debt and a recent study authored by Mark Whitehouse describes how many nations are facing a rapid escalation of debt compared to productive assets, an escalation which has now brought about a condition where ...the rich world is getting closer to the point where it wont be able to bear the cost of another disaster...

He makes two essential statements in support of that supposition.

First, the role of government has been changing until now it is presumed to be the guarantor of virtually everything. Whitehouse informs us that, ...Increasingly, they have stepped in as the insurer of last resort, taking on the cost of everything from rebuilding beachfront communities to guaranteeing the debts of banks...As advanced-nation governments take on increasing responsibility for insulating their citizens, investors, banks and companies from the pain of disasters, they are pushing their financial resources closer to the limit.

Next, and as a result of the first, he informs us that government indebtedness compared to production has increased dramatically, noting, ...As of 2010, the average central-government debt burden among advanced nations stood at 74% of annual economic output, more than triple the level of 1970...Thats the highest level since the aftermath of WW II.

One thought we would add looking forward is this: If this terrible record was accumulated during a period of relative historic prosperity, what calamities might occur in the event of a genuine financial collapse?

One other area of immediate concern is pricing in the petroleum complex. Crude Oil has moved to yet another recovery high this morning, with the nearby May contract reaching close to $108 per barrel and the gasoline contract for May has similarly moved sharply higher over the past few days, reaching over $3.13 per gallon this morning, up from $2.20 just five months ago.

These increases are now working their way through society in the form of higher gasoline, fuel oil, airline fuel, diesel fuel, heating oil and marine fuels around the world. As consumer prices rise, this drains monies which would otherwise be spent in the consumer economy, dragging down commercial activity, thereby impeding governmental efforts toward economic stimulation.

One last thought on the subject of petroleum, and this is a line used by real estate salesmen from time immemorial namely, they arent making any more. The same is true of oil. It took hundreds of millions of years to create the giant pools of decayed carboniferous material which became todays petroleum reserves. Those reserves are being depleted at a historically astonishing rate, while the creation of new resources is non-existent. You cannot subtract from a static quantity in an infinite manner. Mathematics simply does not work that way.

We believe there is a day of true reckoning ahead for the worlds energy markets and it is going to alter the way we live in a profound manner.

When all of the above is considered, we remain convinced that precious metals investments should be considered for both insurance and capital gain strategic positions.

As of 9:40 AM PDT, financial markets continue to show gains with the Dow ahead by about 90 points and the TSX Index up by more than 50. Precious metals have encountered some heavy selling, but are improving from their lowest levels with gold now trading near $1,425 and silver near $37.50. Base metals are mixed with copper and nickel somewhat lower but zinc and lead are moving higher. Metals share indexes have moved slightly to the downside.

In other markets, petroleum remains sharply higher, the US Dollar is down modestly and long-term interest rates are close to unchanged.

All quotes US$ unless otherwise indicated.

Next Melman Minute scheduled for Monday, April 4, 2011

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