A Melman Minute — April 6, 2011

US National Debt, Wednesday, April 6, 2011 - $14.243 trillion

Authorized debt limit - 14.294 trillion

Difference - $51 billion.

Looming deadline Friday, April 8, 2011 (Congressional estimate)

There is little doubt in terms of our headline news for this morning, since both silver and gold have been powering ahead for the past few days into either all-time record or multi-decade highs as gold is moving quickly toward the $1,500 mark and silver appears poised to break through $40.00 per ounce.

It is also worth noting that mining share indexes are also moving sharply higher as many traders apparently are looking at the powerful moves in gold and silver as harbingers of strong breakouts to the upside which could lead to much higher prices over time. For ourselves at The Melman Report, we are holding to our forecast of a high for the year in gold of $1,850 to be attained in the fourth quarter.

Many observers point to the escalating problems of the entire European Economic Community as the proximate reason for gold and silvers advances, assuming that substantial funds are being taken out of Europe and being invested in the precious metals. Others point to the onrushing American debt management problems as the resolution of National Debt Authorization confrontation seems farther away than ever with time running out.

What seems particularly striking is the enormous divergence between the Democratic and Republican party positions. On the one hand, Congressional Democrats, perhaps mindful of the 2008 Yes, We Can campaign of Barak Obama when he promised virtually the sky and the moon to anyone who would vote for him, still want to maintain the social/welfare state apparatus while Republicans seem more ready than ever to chuck the whole structure and start something brand new.

Democratic proposals, put forward primarily by Senate Majority Leader Harry Reid, call for relatively minor cuts while maintaining the entire structure. Reids proposals have been met by Republican House Budget Committee Chairman Paul Ryan of Wisconsin whose proposals have been described by the Wall Street Journal as calling for, ...the government should stop being a provider of services and instead become a limited entity that collects taxes and passes them to state governments or private enterprises to administer. It reduces Washingtons role in providing health care and sharply cuts taxes.

What is ironic to a student of American history is that the Republican Party position conforms very closely to the America envisioned by that countrys Founding Fathers who felt that the states should be primarily responsible for the management of the society at large and the central government should do little more than insure a level playing field between the states, provide for national defence and a system of courts and little else.

It appears to us that President Obama is caught squarely in the middle, particularly in light of the fact that he has just announced the official beginning of his 2012 Presidential campaign. His partys major constituencies such as minority support and powerful backing from civil service labor unions have been built on government generosity with taxpayer funds, but the 2010 election which saw Republicans make major gains indicated that the majority of voters want anything but a continuation of the same style.

All of this is raising political uncertainty to an unusually high level and we have always regarded uncertainty as a prime ingredient in historic precious metals bull markets.

In the case of Treasury Secretary Tim Geithner, he is warning that a crisis will occur unless Congress approves the increase in Americas National Debt Limit. In a letter to Congress, Geithner declared that a refusal to approve the increase would trigger, ...a financial crisis potentially more severe than the crisis from which we are only now starting to recover. Among other things, the government could have to stop or delay paying government salaries and halt Social Security and Medicare benefits. The impact could also reach financial markets and the operations of major corporations.

At the same time, Federal Reserve Chairman Ben Bernanke was reporting that all was well with inflation in check and the economic recovery continuing apace. Our interpretation of his remarks is not to rock the boat by failing to raise the debt limit and perhaps cause a government shutdown, just when things were improving.

One other story of note gives us the chills. As America and other coalition partners gradually reduce their presence in Afghanistan, reports are beginning to emerge that al Qaeda is once again setting up shop in mountainous regions of that country. By late September, intelligence photos identified new training camps and various intelligence reports indicate that over the past six to eight months, Al Qaeda is accelerating development of such training facilities.

A resurgent al Qaeda, in our opinion, is a matter of the gravest concern, given their open and unyielding hostility to all things Western or even remotely connected with the State of Israel.

As of 10:00 AM PDT, financial markets in Canada and the US are mixed, with the TSX off by about 120 points while the Dow Industrials are ahead by 25. Precious metals continue to hold on to a portion of their earlier gains with gold trading right at $1,460 and silver near $39.30. Base metals are up strongly across the board while mining share indexes have fallen back to about unchanged. The US$ is down sharply in currency trading with the DX Index once again under 76, crude oil is up moderately and long term interest rates are moving upward once again.

All quotes US$ unless otherwise indicated.

Next Melman Minute scheduled for Friday, April 8, depending on Internet connections while we are en route to Calgary to speak at the Cambridge House Resource conference in that city, scheduled for April 9-10. The presentation topic will be On the road to Hyperinflation. Please note that we have removed the question marks previously appended to the end of that title.

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