A Melman Minute — May 4, 2011

It is difficult to recall a time when so many headlines of great importance, particularly in their relevance to our world of precious and base metal mining, were flying around the world at one and the same time. However, as it relates to our primary focus, three appear to be of primary concern; the Canadian election, the announcement of Osama Bin Ladens assassination and the sharp break to the downside in the price of silver. Here is our take on each one.

CANADIAN ELECTION

When Canadian voters began casting their ballots Monday morning, few observers would have predicted the dramatic outcomes which took place over the next few hours.

First, the Conservative party of Canada was handed a strong majority after enduring two consecutive minority governments when their hands were tied by the ability of their opponents to gang up and force new elections. Stephen Harper and his party are now assured of four years of almost absolute rule over the Canadian political structure.

Second, the Liberal Part suffered a catastrophic defeat, which, combined with the ascendency of the New Democratic Party, has simplified the Canadian political structure into an almost direct confrontation between forces of the political Right and Left, rather than struggles based on some variety of centrist oppositions. In fact, we may have witnessed the virtual demise of the Liberal Party as a political force.

Third, the New Democratic Party (NDP), which labels itself clearly as a socialist democratic group, made gains which were truly astonishing in comparison with their past efforts. They now hold more than 100 seats in a 308-seat Parliament, about quadruple their previous best.

Fourth, the Bloc Que3becois, a party dedicated to the creation of a separate country of Quebec, was utterly decimated at the polls, losing 40 of their 44 seats and being reduced to a handful of bystanders. We also believe that their demise signaled the end of the Separatist Movement as an important political consideration.

With this series of considerations in mind, we believe the election will have two very positive impacts on the world of mining in Canada.

For several years at least, there will be a political force in power which is not at all in sympathy with the more radical segments of the environmentalist movement. And, as it relates to mining in Quebec, we expect that province to continue their strong cooperation with and support for mining enterprises since there is now a clear commitment to remain an important part of the Canadian economic society.

OSAMA BIN LADEN

What appeared to be a straightforward story of a direct military operation is now getting stranger with each passing day, given the contradictions in the original tale which are now coming to light. It turns out Bin laden was not armed, but was unarmed and one of his wives (he had several) did not die in a hail of bullets, trying to protect her husband and is now quite alive.

There are also questions which relate to the fact that the Obama Administration could provide clarity to the situation, but so far there has been no cogent explanation of why the body of Bin Laden was not returned to Arab soil for burial according to Muslim traditions and also why photographs of the body have not been released.

Given this lack of clarity, rumors are circulating within the Arab world that either Obama is still alive or that he died five years ago; that Obama didnt even live in the town of Abbott Abad where the raid took place. What is clearly apparent is that insufficient information of a credible nature has been released to squelch these and other speculations and as long as uncertainty abounds regarding Obamas fate, it appears to us that genuine peace in the region and around the world still remains a rather distant hope.

SILVER

Well, the long-anticipated break in silvers price has now occurred with the white metal falling by 20 percent, from near $50 to about $40 in just a few trading days. This has been a much sharper break than what has taken place in gold as the yellow metals price has fallen from about $1,580 to a current quote near $1,530 or less than four percent. Another way of looking at the decline in both metals is to note that the gold/silver ratio has moved smartly in golds favour over the past few days, rising from near 31:1 ($1,550 divided by $50) to a current ratio of about 38:1 ($1,530 divided by $40).

However, it is very important to point out that while the short-term chart of silver has indeed taken somewhat of a hit, in our opinion, the long term chart of silver shows that the major bull market in the white metals remains intact. At present, we continue to regard the current price decline as a correction within a bull market and would hold to the following comments we made in our Melman Minute of April 27, 2011:

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.

One other topic is acting on todays financial markets and that is the Acceptance by Portugal of a relief plan put together by the European Community and the International Monetary Fund (IMF) for relief from its pressing debts. The final package came to 78 billion Euros or about $116 billion. Financial markets are now concerned that further troubles, particularly including Spain, may lie ahead for the Euro.

As of 9:30 AM, precious metals markets continue to trade sharply to the downside with gold now off by about $30 per ounce to near $1,310 while silver has fallen to about $39.00, off by more than $3.00 per ounce this morning. Base metals are falling along with gold and silver and, not surprisingly, mining share indexes are also moving to the downside. Financial markets are sharing the same fate with the Dow Industrials presently down by around 130 points and the TSX is off by close to 180.

In other markets, Crude Oil has just fallen to $109 per barrel; long term interest rates are moving lower and the Greenback has reversed earlier strong selling and is now headed higher.

All quotes US$ unless otherwise indicated.

Next Melman Minute scheduled for Friday, May 6, 2011.

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