A Melman Minute — May 9, 2011

An important part of our analysis work at The Melman Report is to consider price action within the proper time perspective. In other words, what might appear to be drastic action on the short-term chart can actually appear to be less insignificant when evaluated over the longer term, particularly when compared with similar events which occurred in the past. Recent action within the silver market would appear to lend itself to this style of analysis.

Please note the 40-year chart on silver which includes the very recent past as well as the dramatic collapse of silver which took place in early 1980. In the previous episode, silver peaked on January 31, 1980 at an intra-day high of $50.00 and then collapsed in one sheer drop to $11 in mid-February before a recovery to about $25 developed. The drop from 50 to 11 represented a loss of 78% in silver's value.

In the present case, silver fell rapidly from a high of near $50 to a low of $33 mid-morning this past Friday before recovering to a trading high of $38 this morning, a loss from high to low of 34%; still significant but hardly comparable to what took place in 1980.

The situation relating to gold is even more remarkable. In the 1980 episode, gold fell from $870 to about 470 before encountering any significant buying, a loss of almost 40%. This time around, gold fell from $1,577 to an intra-day low of $1,462 a drop of $115 or about 7% - before encountering strong buying Friday afternoon and this morning which has carried the price well above the $1,500 level as this is written. In fact, on the 40-year chart for gold, the latest break makes virtually no impact whatsoever.

Clearly, the breaks in the precious metals, while obviously discomforting for many, are not yet comparable to the true, bull-market-ending moves of 1980. We will watch closely to determine if that nature of selling ever develops.

It is also worth noting that the severe selling in many other commodities also met with determined buying this morning, specifically including rallies in crude oil, base metals, grains and several food-related `softs` such as coffee and sugar, supporting our belief that the recent breaks were important corrections within ongoing bull markets, rather than signals that markets were in true reversals of long term trends.

The world of precious and base metals mining was hit by at least three adverse developments over the past few days, highlighting the variety of risks to mining which seem to inhabit our industry.

First, mining companies either exploring in northwest British Columbia or contemplating operations in that region were looking forward to the construction of high-voltage power lines into that remote region, as previously announced by the BC provincial government. Despite the major power lines having received environmental approval from the federal government, it appears miners may have to stretch out their time horizon as the area's aboriginal tribes have announced their strenuous objections to the project.

In an article in this morning's Vancouver Sun, two of those `First Nations` stated their objections that B. C. Power's cash offers to the tribes were efforts to buy them off with mere `beads`. They said they were now withdrawing from negotiations and were prepared to erect blockades to prevent any construction progress across `their` lands.

Given the high and rising cost of diesel fuel generated power, the mining industry looked with eager anticipated toward the completion of the project which would, at last, provide a source of reliable and cost-effective electric power. The province looked forward to the project as an attraction for job-creating new industries.

But all of that is now on hold.

Second, an impressive list of Canadian juniors with operations or exploratory projects in Peru must be looking at the forthcoming June 5 Presidential election with a high level of trepidation as both the leftist and center-right candidates have clearly expressed a desire to raise taxes on profits generated by mining in order to fund their socially progressive programs.

The center-right candidate, Keiko Fujimori, daughter of ex-President Alberto Fujimori, stated she would raise the taxes on mining profits in order to help fund developmental projects while the Leftist candidate, Ollanta Humala, called for a 30% increase in taxes on mining profits to fund a 20% increase in Peru's minimum wage.

Comments such as these only serve to confirm our impression that for many governments around the world, the mining industry represents a most attractive target whenever funds are needed for `social development`, a trend which does not seem to be abating.

Third, giant mining enterprise Vale SA is going to court to fight a C$36 million judgment in favour of homeowners in Port Colborne, Ontario for compensation as a result of previous smelting operations carried on by Inco`, which was later bought out by Vale SA.

The issue at hand is whether a future litigant can sue for damages against a current company (Vale SA) when the preceding operator (Inco) carried out their work in accordance with all laws which prevailed at the time of those operations which ended in 1984.

In a recent article, the Toronto Globe and Mail noted, ``Some critics said the judgment should be `terrifying` to any industry with a smokestack as it could expose even companies that follow all environmental rules to massive judgments.``

One other story of potentially major importance in relation to future visible price inflation caught our eyes this AM. Several commentaries out of China are beginning to confirm that forces are building in that country which could ultimately result in rising prices for Chinese-manufactured items. Three in particular seem very important and include:

Increasing demands from Chinese skilled workers to share more directly in China's prosperity by raising the general level of salaries,

A rapidly aging labor force which is failing to provide sufficient numbers of young workers, and

Rising pressures on the exchange rate for the Chinese Yuan which would increase currency costs for all importing nations, costs which would then be passed on to consumers.

This is a trend well worth watching.

As of 9:30 AM PDT, precious metals are holding to their recent gains with gold up by about $13 to $1,508 and silver ahead by almost $2 to over $37 per ounce. Base metals continue to recover strongly and mining share indexes are up by less than one percent as many share traders clearly remain skeptical regarding this morning's recoveries. Financial markets are also moving upward with the Dow Industrials and Canada's TSX Index both up by about 70 points.

In other markets, crude oil has soared by over $3.00 to the $101 per barrel level, the US Dollar is slightly higher in currency trading and most interest rates remain little changed.

All quotes US$ unless otherwise indicated.

Next Melman Minute scheduled for Wednesday, MAY 11, 2011.

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