A Melman Minute — May 25, 2011

Todays news background has been relatively quiet, particularly in terms of short-term developments. Therefore, this gives us an opportunity to devote some time to questions which could have a dramatic impact over time on the price equation for our precious metals. The two topics are the sudden development of a genuine rift between Israel and the USA and the growing threat to European (and worldwide) economic stability.

I have just finished watching a remarkable address by Israels Prime Minister Netanyahu to the US Congress, delivered yesterday. In my personal opinion, what made it remarkable was that, in full view of the American Congress, Netanyahu, politely but firmly, laid down the terms by which Israel would agree to accept the creation of an independent Palestinian nation and those terms were not in agreement with some of the conditions just outlined by President Obama in a nationwide address delivered a few days earlier.

It was also quite unusual in the language used, namely it was specific and to the point whereas most political addresses tend to be aimed toward general appeals to feelings and emotions.

Among the points made by Netanyahu were these:

Israel will NOT return to the pre-1967 borders. He stated that such borders would be indefensible.

Israel is fully willing to enjoy peace with a neighboring Palestinian State, but such a state must not include the participation of such terrorist organizations as Hamas or Hezbollah.

The new unrest in the Middle East and across North Africa underscored the potential fragility of peace treaties negotiated with an administration which appeared powerful today (such as Hosni Mubarak in Egypt) but which could be gone tomorrow.

He stated clearly his belief that the inability to achieve peace since 1948 was not Israels refusal to accept the existence of a Palestinian state but the Palestinians open avowal to reject the existence of a Jewish state.

He also noted that the greatest threat to peace on earth was the drive to produce nuclear weapons by Iran, declaring that if they succeeded in obtaining such weapons, they could be delivered anywhere via missiles, ships, land transportation or air force bombers. He also stated that such weaponry would obviously pose a mortal threat to Israels existence.

The speech appeared to be well received with over 20 interruptions for rounds of standing applause, which some observers noted could be interpreted as a rebuke of some sort to the President whose stated position was somewhat different in both details and emphasis.

The question of Israel and the Middle East is of great importance in our considerations of potential influence on the price of gold and silver in particular, but also as it relates to the world of petroleum. The eruption of conflict into open warfare could bring on a period where either the ability to transport oil worldwide was compromised by military actions or where the distribution of petroleum could be withheld for political purposes. In either case, prices could lurch substantially higher without warning, thereby compromising economic stability.

This saga could be entering a critical time period. We at TMR will do our best to keep readers current on major developments.

The currency crisis in Europe continues to grow and some of the possible ramifications of any genuine debt failure by a European sovereign nation most likely Greece at this moment - could truly threaten world economic stability.

There is little question Greece is in deep trouble and the world must now face the reality that Greek government debt can no longer be repaid either in principal or interest with anything other than massive infusions of new borrowed money which will then be piled upon existing debt. However, even this solution requires a willing lender and those are becoming more difficult to find.

The European community is now becoming bitterly divided between two forces. One camp says that the consequences of a Greek debt default of one sort or another must be faced, no matter the pain. The opposing sides position is that lenders must be found at any cost because otherwise those consequences would be unbearable.

A debt default by Greece would indeed be difficult to stomach. In simple terms, a bond is an agreement by a borrower to pay a lender interest at an agreed-upon rate for the term of the bond and to return the principal amount in full at the expiration of the bonds life. Therefore, whatever form any default might take, in essence it would mean that holders of such debt would not receive their principal plus unearned interest according to the original and legally binding schedule.

One of the most important concepts relating to any default is that the holders of such debt normally take on new obligations based upon the expectation of receiving their funds on a given debt, so a default by the originally bond issuer could have second and third level repercussions or even further. When the holders of government debt include major banking establishments, an actual threat to the capital structure of various banking establishments can be involved and that is one of the major consequences of debt default about which we are being continually reminded.

Another consequence of default or restructuring is that if Greek debt begins to default, other countries such as Ireland, Spain, Iceland, Portugal and Italy might find that sources of new lending for their own debt refinancing are drying up which might force them into default as well.

At the same time, it is becoming exceedingly difficult in political terms for nations such as Germany to continue providing funds for new debt to refinance old as that countrys citizens are rebelling strongly against paying their treasure to countries which have utterly failed to show financial restraint and which also provide an array social benefits in excess of what German workers receive.

One of the pledges made by governments facing debt troubles is that they will adopt austerity measures including cutting back on various social welfare programs, but the political reality is that they face open rebellion from their citizens whenever such measures begin to truly bite.

The situation is unraveling and fear and uncertainty are now growing among important European financial market participants.

As of 10:30 AM PDT, financial markets are overlooking these and other problems and are moderately higher with the Dow Industrials ahead by about 22 points while Canadas TSX Index, riding higher metals and petroleum prices, is up by over 120. Gold has traded above the $1,530 mark and silver is putting on a strong performance, rising almost two dollars per ounce to near $38. (See one-week short-term chart) Base metals and mining share indexes are showing strong gains for the second consecutive day.

In other markets, Crude Oil has hit a recent high above the $101 per barrel level; the US Dollar is slightly weaker on currency exchanges; and most interest rates have traded quietly, showing little change.

All quotes US$ unless otherwise indicated.

Next Melman Minute scheduled for Friday, May 27, 2011

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