A Melman Minute — April 15, 2011

If there is one bedrock principle we have followed since the initiation of this site, it has been to keep ones attention focused on the powerful trends, rather than day-to-day fluctuations or events. Todays market moves appear to clearly confirm this principle and we are including three charts to illustrate this most important point.

First, please note the 5-year chart on gold. Despite periodic sell-offs, each reversal has soon been met by renewed buying which invariably has driven the price of gold to historic high levels and this morning, as of about 8:30 AM PDT, the price of the yellow metals is now within less than $15.00 of the psychological barrier at $1,500 per ounce. Round numbers are important, and few have the significance of this mid-way mark on the way to $2,000 per ounce.

The Canadian Dollar offers us a similar confirmation relating to powerful trends. Despite many short-term corrections, for more than two years the C$ has moved steadily higher against the US Dollar and now stands near the US$1.04 mark, a level which might have appeared unattainable just a couple of years ago. Virtually all attempts to trade the C$ from the short side for quick gains have been loaded with danger.

Like the Canadian Dollar, the price of Crude Oil has trended steadily higher since early 2009, despite arguments for lower prices which appear sound and reasonable, including such as demand would decline due to weak economic performance, high prices would curtail rising demand, new discoveries were being made on a regular basis, known supplies appeared inexhaustible, maximum productive capacity was well in excess of reasonable demand predictions, etc. In fact, all of those statements havent stopped the trend from continuing toward ever-higher prices and crude oil is once again near $110 per barrel.

We do not suggest that trends do not reverse themselves, but we do suggest that while a trend is in effect, betting against that trends direction can become a very painful experience.

By far the most important news event relating to the financial background as it affects the base and precious metals was the Wednesday speech of President Barak Obama, since there was a real possibility he would be discussing a true revolution in American politics; one away from massive government social and economic interventions and toward a simplified, less expensive form. Therefore, we eagerly printed and studied the text of that speech. Here are our conclusions.

Simply put, in our opinion the speech was purely partisan in nature, forming yet another politically-motivated excuse to tax the rich because they could afford to turn over more of their wealth to the nations tax-gatherers, and to assure the public that virtually every social service of government which benefits the students, sick, elderly, disadvantaged, unemployed, research scientists, Social Security recipients, Medicare recipients, poor children, disabled, drug addicted, veterans and so forth would continue unabated because that was, The America we believe in.

The political nature of the speech was clearly evident in the manner in which the President addressed Republican suggestions to bring spending in line with revenue when he noted that their proposals would lead to an America where, ...Its a vision that says if our roads crumble and bridges collapse, we cant afford to fix them. If there are bright young Americans who have the drive and will to go to college, we cant afford to send them...Its a vision that says America cant afford to keep the promise weve made to care for our seniors...

I think you get the idea. Republicans, by trying to actually cut spending in a real manner, become the bad guys, but the Democrats, by never identifying any specific cuts to spending but would accomplish budget balancing by cutting waste and other such non-specific measures which wont harm anyone, become the good guys.

During the speech, he made references to ...we will need to make reforms. We will all need to make sacrifices. However, it would appear from his later statements that the only ones to make sacrifices would be the wealthiest two percent of taxpayers who would see their tax obligations rise. For the remainder of Americans, he offered these platitudes:

Well invest in medical research and clean energy technology.

Well invest in education and job training.

Well invest in new roads and airports and broadband access.

I will not allow Medicate to become a voucher program that leaves seniors at the mercy of insurance industry.

I will not tell children with disabilities that they have to fend for themselves.

But we must (reform Social Security) without putting at risk current retirees, the most vulnerable, or people with disabilities, without slashing benefits for future generations, and without subjecting Americans guaranteed retirement income to the whims of the stock market.

The speech ran eight printed pages and, after reviewing it word-for-word and line-by-line, I could not find one single, specific agency or bureaucracy which would suffer any staff reductions, budget reductions or outright elimination of its function. Not one.

Given the rally in gold and silver this morning, the renewed strength in the petroleum complex and the continuing weakness in the US dollar, I suspect many others are also very sceptical about any real determination on the part of the President or his party to truly cut back on the enormous scope and intrusion of government.

As of 9:30 AM PDT, precious metals markets continue to be the headliners with gold trading at a historic record of $1,486 per ounce and silver reaching a new three-decade high above $42.50. Base metals are mixed with copper and zinc trading lower but nickel, aluminum and lead are moving higher while mining share indexes are little changed.

Financial markets are stronger with the Dow Industrials ahead by about 70 points and Canadas TSX Index has gained about 35. Long term interest rates have fallen so far, Crude Oil is once again approaching $110.00 per barrel and the US Dollar is little changed in todays currency trading.

All quotes US$ unless otherwise noted.

Next Melman Minute scheduled for Monday, April 18, 2011

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