A Melman Minute — April 27, 2011

On a personal note, it was a great pleasure to speak at the just-concluded ICMJs Prospecting and Mining JOURNAL (formerly California Mining Journal) prospectors and miners gathering at Placerville, California over the weekend. It has been my privilege to have authored a column entitled Melman on Gold and Silver for that publication during the past quarter-century and many long-time readers were present, enabling us to share stories about the mining past and enjoy discussions regarding the outlook for the future. Kudos to publishers Scott and Sally Harn for presenting this event as it assists smaller prospectors and miners to speak with a somewhat united voice regarding issues of the day.

One of the most frequently discussed topics was the enormous rally in the price of silver during the past year. Many miners suggested that silver might be overbought, at least for the short term, and they were concerned that a correction might be in store. In fact, the silver market delivered just such an event during the past few days, falling from a spectacular high of just under $50 per ounce to the vicinity of $45.

Our analysis of the price chart suggests that the long term bullish trend for silver remains in effect and, if this is a normal correction, it should retrace one-third to two-thirds of the last advance. That rally carried silver from near $26 to just under $50, a distance of around $24.00, suggesting a correction of $8 to $16, setting up a target zone of $34 to $42 before the bullish trend resumes. We are presently quite close to the upper range of that zone.

(Of course, technical analysis provides us with estimated target areas, not trading certainties, and we would repeat our warning that no investments should be made without prior consultation with registered investment professionals.)

The price of silver (and gold as well) was hardly the only price-related topic which was frequently discussed. In fact, most prominent of all was the price of petroleum in general and both gasoline and diesel fuel in particular. As the price of gasoline soars to over $4.00 per gallon in many American states, with diesel fuel even higher, those prices are beginning to take a true bite out of the budgets for many mining operations, with the effect of such prices on general retail trade another important consideration as shoppers cut back on mall visits.

As can be clearly seen, the price of gasoline is now approaching the historic peak reached in 2008 when such prices caused great consternation.

By the way, if readers in America feel ill-used by such prices, they should consider the plight of Canadians where the typical price of a litre of gasoline is about C$1.32. Performing the arithmetic translation, we find that price per litre becomes the equivalent of $4.996 per gallon (1.32 x 3.785 and when the present currency conversion (C$1.00 = US$1.045), we find the present gasoline price for Canadians is the equivalent of US$5.22 per gallon. That price is also beginning to bite hard against the budgets of many Canadians, both in private and in terms of commercial operations of all types.

By the way, Canadians would be horrified by gasoline prices in Europe which are several increments higher than their own.

Higher fundamental material prices could be an indication of increasing visible price inflation which historically has been a major plus for the monetary precious metals.

Speaking of Canada, an important election is scheduled to take place this coming Monday, May 2, 2011. Normally, Canadian federal elections would not appear to have any important impact on our world of base and precious metals mining, but this one could be an exception due to a rather startling last-minute trend which appears to be taking place.

Throughout Canadian history, governments have been formed by only two parties, the Liberals and Conservatives, both of which have been generally supportive of mining through the 144 years of the Dominion of Canadas existence.

However, something of an unusual nature has developed over the past ten days or so. Excluding the Bloc Quebecois which concerns itself exclusively with that province, there are three major parties in Canada; the leftist New Democratic Party (NDP), the centrist Liberals and the rightist Conservative Party of Canada (CPC). In past elections, the NDP has been a clear third, garnering unionist voting and some die-hard socialists, but, quite suddenly, they have surged in the polls, actually passing the Liberal Partys (LP) results and also threatening to upset predictions of a possible Conservative majority.

The relevance to the mining industry is clear. As long as the LP or CPC continue in power, the mining industry could reasonably expect to continue along the present regulatory path. However, one of the strongest elements within the NDP is the environmental movement which historically is virulently anti-mining. Whenever that party has been in control of any provincial government as has been the case in British Columbia and Ontario on occasion during the past two decades in effect, they have transformed the provincial mining ministries into the no-mining ministries.

Even the Wall Street Journal has noted the NDPs surge in the polls in an article entitled, Small Party Gains Clout in Canada, noting, ...One poll, released Monday by EKOS Research Associates, suggested the NDP could win as many as 100 of the 308 seats in the House of Commons...thats up from just 36 seats the party now holds.

Even if the Conservatives continue to form Canadas government in either a majority or minority situation, the NDP surge could bring additional power and influence for the Canadian environmental community and that would not likely be a welcome development for Canadian miners.

Market observers are waiting for Fed Chairman Ben Bernanke to begin his next press conference and await word on whether the Fed will continue with its policy of Quantitative Easing. Many expect a reduction or even a cessation of such policies, but one consideration perhaps auguring for a continuation of such actions is the continued ongoing decline in residential real estate prices, a reality which continues to shrink consumers collective purchasing powers.

The S&P Case Shiller residential price index for February just fell an additional 1.15%, bringing prices back down toward their recessionary lows. Quite ironically, the only metropolitan area to show rising prices was Washington, D.C. Maybe politics is the only recession-proof business. At the other end of the scale, cities such as Atlanta, Chicago and Seattle not similarly endowed with a concentration of federal monies - saw their home prices drop to new recessionary lows.

As of 10:00 AM PDT, financial markets in Canada have been headed lower, perhaps on the uncertainty being generated by the NDP surge, with the TSX Index off by about 85 points while the Dow Industrials continue their recent rally, up about 40 points so far this morning. Gold has surged to the $1,513 area while silver is trading near $$45.80. Base metals are mostly lower and mining shares are slightly down on the session.

In other markets, Crude Oil is now approaching the $113 level and the gasoline contact is presently in excess of $3.40 per gallon. The US Dollar Index continues to show some weakness while long term interest rates are off so far in this mornings trading.

All quotes US$ unless otherwise indicated.

Next Melman Minute scheduled for Friday, April 29, 2011.

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