A Melman Minute — April 20, 2011

We are seldom amazed when politicians begin acting like, well, politicians and statements yesterday by both President Obama and Treasury Secretary Geithner followed the old familiar pattern of politicians assuring the public that the situation under their leadership, of course is well in hand. As noted Monday, bond rating agency Standard & Poors had just made the first truly negative comments regarding Americas economic future by such an agency and Obama and Geithners comments were in response to the S&P declaration.

As noted by financial writers Damian Paletta and Carol Lee, the purpose of Geithner and Obamas remarks was to, ...express confidence that Washington would solve its budget problems, seeking to tamp down concern over a credit rating report that questioned the countrys long-term fiscal health.

What struck us as the most essential point about the statements uttered by these political giants is that specific plans to cut back the present level of stupendous (stupid?) government expenditures by abolishing some agencies, terminating huge numbers of government employees, eliminating regulatory agencies, cutting back on specific welfare programs and so forth were never mentioned.

All we got from Obama, in fact, was a general comment that lawmakers would somehow come up with a deal to reduce the deficit and that it was a good sign that there was cooperation leading toward an agreement. Of course, he added that reaching an agreement wouldnt be easy but he was sure they could get the job done, despite some fierce disagreements.

At the same time, Treasury Secretary Geithner was lobbying to increase Americas Authorized Debt Limit as the US National Debt is now nearly equal to the present authorized limit. However, like the Presidents, Geithner refused to deal in specifics such as exactly how high the new debt limit should be set or how the incredibly rapid expansion of government debt could be halted.

In our opinion, these kinds of statements are truly not worth newspaper space or air time. We also believe they tend to confirm the original S&P statement, which detailed a lack of specific and believable plans to bring credibility and believability back into Americas financial system.

We believe that this lack of confidence in the US Dollar is spreading and we are re-printing the chart on the US Dollar Index to illustrate that many currency traders around the world are losing confidence in the future value of the Greenback as its relative value has now plunged to the lowest level in almost three years and, in fact, that Index appears to be heading toward a test of the historic low levels set in mid-2008.

We believe there is another powerful factor in play relating to US Dollar weakness and that factor is rising base materials price inflation and we would like you to take notice of a second chart, one which we at The Melman Report believe could be a powerful indicator regarding the monetary precious metals future. We are referring to the Continuous Commodity price Index which measures general commodity price movements over time. That index has soared into historic new high levels, indicating that commodity price inflation IS ALREADY RAGING.

Some governments, such as the USA, appear willing to simply ignore the inflationary implications of such increases by failing to take any measures to fight against inflationary threats, by leaving interest rates at historic low levels and by leaving the monetary creation floodgates wide open. Other governments are not so willing.

Deliberate interest rates increases are now taking place as a matter of policy in Brazil, China, the U.K. and in the European Economic Community among others and market-forced, de facto increases have struck against the debt paper of Greece, Portugal, Ireland, Spain, etc.

As a result, it is becoming much more expensive, on relative terms, to hold US Dollar-denominated debt instruments which pay virtually no interest through the short to intermediate term, and we believe much of the recent Dollar Index weakness can be attributed to that factor. But there may also be yet another potentially vital factor at work.

China appears to be making strong moves toward increasing the international viability and acceptance of its home currency, the Yuan also known as the Renminbi - and there are two facets of their recent discussions which we believe could have ominous implications for the US Dollar. First, there is the staggering quantity of US government debt now held by both individual Chinese citizens as well as their government and, second, the continuing international trade deficit facing the USA.

At present, the Yuans value has been determined by its relationship with the Greenback, but China is now making moves toward full trading viability against all currencies, with the goal of making the Yuan a full internationally acceptable currency for settlement of all monetary matters and to have the Yuan openly quoted in relation to other currencies. In addition, and of the utmost importance, the size of the Yuan-denominated debt market is suddenly growing rapidly, having expanded from barely 11 billion Yuan in 2009 to over 30 billion Yuan in 2010.

We believe the implications of this new emphasis for the US Dollar could be truly negative.

At present, when China accumulates US Dollars, for the most part no currency market sales in the Greenback take place but rather those funds are most normally directly invested in US debt, public or private. However, in future that might all change as dollars sent to China could then be exchanged directly, through currency markets, into Chinese Yuans with each transaction being marked by a sale of US Dollars. Given that the US Balance of Trade deficit now runs over $600 billion per year, we are talking about a serious threat to the viability of the US currency.

There is also the matter of the several trillion dollars of US debt paper already in Chinese hands. If any significant portion of such debt is sold (by selling US Dollars) and converted back into Yuan, Yen or Euro holdings, the downward pressure on the Greenback could likewise be severe.

The dangers to the US Dollars status as the reserve currency of the world, meaning that currency where other nations prefer to store their monetary reserves, are growing steadily and we would offer the opinion that as the US dollars comes under increasing threats to its reserve status, the attraction of holding a portion of ones stored monetary assets in gold will become increasingly apparent.

Ergo, we continue to believe that the precious metals bull market will advance further, that it will accelerate over time and that it will ultimately reach levels which today seem unimaginable. At least, that is the way we see things at TMR.

As of 9:30 AM, gold and silver are advancing sharply, with silver making the much larger percentage move, and it is worth noting that platinum and palladium are making truly outsized gains as well this morning. At this time, the quotes on all four respectively are about $1,503, $45.10, $1,800 and $760. Base metals are also gaining on general corporate earnings optimism with copper up by over 7 cents to just above the $4.30 mark and mining share indexes, not surprisingly, are also showing considerable strength.

Financial markets in both Canada and the USA are also higher following several strong earnings announcements with both the Dow Industrials and the TSX Index up by about 170 points. Crude oil is moving up on lower Greenback quotes and is now trading above $111 per barrel while the US Dollar Index remains sharply lower and long term interest rates are little changed.

All quotes US$ unless otherwise noted.

Due to travel requirements to speak at the ICMJ Prospecting and Mining JOURNAL convention in Placerville, CA over the weekend, there will be no Melman Minute prepared for this coming Friday, but they should resume on schedule Monday, April 25.

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