A Melman Minute — May 31, 2011

NOTE: Mr. Melman will be speaking at the upcoming Cambridge House Resource Conference in Vancouver, scheduled for Sunday, June 5 and Monday, June 6. He will be offering a PowerPoint presentation entitled On the Road to Hyperinflation Revised June 2011 at 11:00 AM, June 6 and will appear in a panel presentation at 5:30 that afternoon which will be devoted to the subject of gold.

One of the great questions facing metals investors is the future of the United States dollar and it is almost impossible to over-state the significance of that currency as virtually every important commodity on earth is primarily priced in Greenbacks. In basic terms, when the Greenback is appreciating, it takes fewer US$ to buy a given quantity of such items and, conversely, when the Greenback is falling in relative value, the quoted price per unit moves higher.

It is also worth noting that another important factor relating to the US$s value is economic performance within America, both current and anticipated, since the creation of new quantities of fiat currency frequently accelerates during times when government leaders determine that the economic structure requires stimulation. Historically, the price of gold has been directly influenced by levels of money creation.

With these factors in mind, lets take a look at the five-year chart of the US Dollar Index which has ranged from three different peaks just under the 90 level to multiple declines which have ended in a support zone between 71 and 76. At present, the Index is once again headed lower short term and is currently trading near 75, well within the support zone, and less than four points above its multi-year bottom.

In our opinion, a break in this all-important Index below the previous bottom near 71 could have very serious consequences in the form of rising US$ prices for a host of commodities leading to higher interest rates, as well as being a factor in reducing Consumer Confidence levels within America.

Interestingly enough, the just-released report on the Conference Boards Consumer Confidence Index has shown a dramatic decline in that Index, a decline which came as a distinct surprise to many observers. The Indexs current reading for May fell to 60.8 from 66 in April and came in well below economists predictions of 67. The reading of 60.8 was the lowest since last fall.

According to an AP article of this morning, the Director of the Conference Boards Research Center, Lynn Franco, attributed the decline to consumers being ...more apprehensive about future business and labour market conditions as well as their income prospects. She also noted that there were growing fears regarding inflation, particularly in relation to gasoline prices which averaged almost $4.00 per US gallon in early May.

According to the AP article, another important factor affecting consumer sentiment was the residential real estate market which stubbornly refuses to improve as residential home prices have now fallen for eight consecutive months and presently stand near their lowest levels since the housing boom shattered in early 2007. They noted that the surplus of unsold homes continues to be huge, leaving little incentive for anyone to step up and purchase residential property for any reason other than basic family housing.

Looking six months into the future, such readings performed even worse than the current indexes as the number of respondents expecting job numbers to improve over the coming six months declined while those anticipating fewer jobs over the same period increased.

Clearly, the relentlessly optimistic words of Americas political and economic leadership are not having the positive impact among consumer attitudes that might have been expected.

From our point of view, if the Consumer Confidence Index is accurately reflecting present and future economic performance, we would anticipate a continuation or even expansion of the Feds Quantitative Easing plans beyond the expiration of QE2, set to end within the next few months. In our opinion, further QE programs will have a weakening effect on the Greenback, leaving the door open to a host of ultra-serious problems such as rising inflation, much higher interest rates and even potential worldwide financial panic all of which, by historic comparisons, would be positive for the precious metals.

Few countries have proven to be as attractive for mining during the past few decades as Mexico as they have enjoyed the unique combination of excellent geologic prospects, favourable government policies, reliable courts of law and a steady source of well-educated and well-trained domestic mining personnel. However, Mexico has received more than its share of negative headlines in recent years, most of them associated with its violent and frequently tragic battle against criminal drug gangs.

We also learn that Mexicos economic structure is steadily improving. Their GDP growth rate in 2010 was 5.5%, far in excess of either the USA or Canada. The Mexican Peso is improving against most currencies and their holdings of foreign reserves have passed the $113 billion mark. Tourism is growing, new maquiladora industries continue to add new workers and the percentage of the countrys population living below the poverty levels is on the decline. Literacy rates, now near 90%, are on the rise and life expectancy numbers are near First-World levels, a major accomplishment when compared to previous years.

In our opinion, their drug problems, while remaining serious, are not insoluble at all (witness the startling success of Colombia) and, given the other factors relating to mining and their national economy, we believe that mining enterprises in Mexico will continue to offer substantial opportunity in coming years.

Few industries have suffered as greatly from the mammoth Japanese earthquake of last winter as the world of uranium exploration and development. It seemed there was an endless barrage of information regarding the flaws in the Japanese plants construction and it was not long before other nations began to offer comments that they would be reducing or even eliminating nuclear power production.

The latest shoe to drop has come from Germany where the German government just announced that it was reversing its announced policy of expanding nuclear power production and was going to institute a new policy of shutting down its 17 producing nuclear power plants by 2022.

While this information is most unwelcome to the world of uranium exploration over the short term, we would remind readers of two inescapable conclusions for which no solution other than increasing nuclear power production has been proffered.

First, nuclear power remains the only source of green power which is capable of fully satisfying the worlds requirements in terms of quantity of electric energy for both current and future needs.

Second, the steadily increasing costs associated with discovering and developing petroleum energy resources are reaching a point where those sources may simply be not viable, both in terms of supply and price, going forward. In addition, the prospect of unlimited usage of coal-fuelled power plants is becoming environmentally unpalatable. Therefore, considering the required quantity of power envisioned for the future, the number of realistic alternatives to nuclear power production for forecast world power requirements is minimal, or even non-existent.

But it may take time before these points are fully realized by the general and investing public.

As of 10:00 AM PDT, financial markets in Canada and the USA are taking differing paths with the Dow Industrials still ahead by over 50 points (after opening up by more than 120) while Canadas TSX Index is off by almost 100 points. Precious and base metals are trading close to unchanged on balance, with the exception of platinum and palladium which are both sharply higher. Mining share indexes are a bit lower.

In other markets, crude oil is up by over $1.40 to near $102.00 per barrel, the US Dollar continues to trade lower and long-term interest rates have moved moderately to the upside.

All quotes US$ unless otherwise indicated.

Next Melman Minute scheduled for tomorrow, June 1, 2011.

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