A Melman Minute — May 13, 2011

One of the advantages of having a few extra years of having analyzed markets is that we can relate, at least on some significant level, to the saying that, there is nothing new under the sun, particularly when it comes to mining and metals investments. The latest break in the price of gold and silver seems to apply at this time.

One of the functions of our chart analysis work is to evaluate market moves in relation to public media commentary and the recent late-April to mid-May decline in gold provides us with an excellent example of where public perception may be in error. The general public has now become concerned about a long-lasting reversal in the fortunes of virtually all commodities, but, in our opinion, the long-term chart on gold does not presently confirm such fears.

When gold peaked in early 1980 it indeed marked the end of the 197680 bull market and the initial decline was followed by two clearly identifiable subsequent lower peaks. Following that initial period of decline, gold entered a 15-year bear market, contained within a slightly downward sloping channel which did not truly end until the upside breakout from that channel in 2003.

Since that time, gold has been inside a spectacular bull market which has carried from a bear market low of barely $255 per ounce to a recent peak of $1,577. That long rally has been interrupted by four clear corrections, each one of which threw a serious scare into gold bull market advocates. However, each correction was followed by renewed strength and, during the last 30 months, gold has climbed a steeply rising trend line.

The most recent selling in gold has literally not made any kind of serious dent in the long term bull market and until gold reverses into a series of lower peaks, such as 1980 to 1983, we continue to hold the belief that the long-term picture for the yellow metal remains solidly bullish.

It is also worth noting that the fundamental background which includes serious problems with the Eurocurrency; recent increases in visible inflation; steadily rising Balance of Trade deficits as well as the need for continuing strong stimulus programs in America and other nations would appear to offer confirmation of this analysis.

(Please note our continuing caution that no investments should be undertaken without prior consultation with a registered investment professional.)

The destabilizing of the Eurocurrency continues apace and the number of analysts who indicate that there is simply no easy solution to those growing problems is beginning to escalate. One such writer is European columnist Charles Forelle. In an article released this morning, Forelle discusses three of the solutions now being proposed to tide Greece over for a few more months, but then hits the nail squarely on its head at least in our opinion at TMR by noting, ...None of these three options affects the absolute magnitude of Greeces debt, some 350 billion Euros and heading up. Many economists believe Greece wont ever be able to repay it... (our emphasis)

If Greece does indeed default, Forelle comments, ...that would be a major event that could trigger unknown consequences in the bond markets and banking systems across the Euro zone. That could force Europe into bailing out other governments and their banking systems.

We would simply ask exactly how Europe is supposed to continuing to rescue individual nations if they are beginning to collectively default as a group.

The contagion from the Eurocurrency problems continues to widen, spreading uncertainty in its wake. Historically, such uncertainties have been positive for the precious metals.

Those who hoped the assassination of Osama Bin Laden might calm the terrorist waters received a set-back with word of suicide bombings which killed more than 80 people in Pakistan yesterday. Taliban spokespersons stated that their organization was responsible for the bombings and they were conducted specifically to avenge Bin Laden. They claimed yesterdays actions were only a first strike relating to their revenge plans.

There is also another offshoot to the new deaths, most of which were inflicted against innocent Pakistanis and that has been to raise the level of anger against the US. First, America conducted a raid on Pakistani soil without their governments prior approval and now, as acts of revenge begin, Pakistan citizens fears for their own safety are mounting.

A union of Al Qaeda and Taliban forces could provide a formidable army of terrorists. That could become a vital concern for the West.

One last item worth discussing is the sudden and dramatic shift surrounding the Authorized Debt Limit of the United States. Just a few weeks ago, the world was told of imminent and drastic consequences which would take place if that countrys national debt exceeded the authorized limit of $14.294 trillion.

Well, by the governments own figures, that debt has now soared to $14.333 trillion, far in excess of the limit, but there have been no visible consequences so far.

Now, out of the blue, the government claims the real debt is just $14.270 trillion since many items do not properly belong inside debt limitation calculations and, therefore, the ceiling has not yet been violated. They also added comments that the government has several extraordinary measures available which would further postpone a day of reckoning to July 8, but wait, there is more.

Even though they now state that all extraordinary measures will delay the crisis until that date, the Treasury then said that they must increase the debt authorization by August 2, without adequately explaining exactly how the crisis can be delayed yet another month.

As of 9:30 AM PDT, financial and commodity markets have turned lower with the Dow Industrials now off by over 120 points and the TSX Index has reversed earlier gains and now stands about 40 points to the downside. Precious metals have also seen early gains turn into losses with gold now trading close to $1,490 while silver has slipped back below $35.00 per ounce. Base metals are also moving moderately to the downside as are mining share indexes.

In other markets, crude oil is off slightly near $96 per barrel; long term interest rates are moving lower while the US Dollar is close to unchanged in currency trading.

Next Melman Minute is scheduled for Monday, May 16. Due to travel obligations, there will be no MM on Wednesday, May 18 but they should resume on Friday, May 20.

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