A Melman Minute — July 3, 2011

SPECIAL SUMMARY week of June 26 - July 2, 2011

What a week to be absent from the markets we follow! While we were enjoying the benefits of South American jungle travel last week, markets from precious metals to interest rates to securities exchanges to currency rates were making decisive moves, sometimes in the form of sharp reversals from rece3ntly established trends. In addition, the mining world itself was generating headlines in various forms and many of our long-standing concerns such as the Greek financial crisis, the USA debt limitation crisis and the American budgetary crisis were all continuing to generate their own recurring headlines as well.

Several charts will clearly illustrate some of the dramatic action of the past week.

Gold fell sharply, encountering three significant down days out of the past six, dropping the price below $1,500 per ounce and also breaking a short-term uptrend in the process. Significant chart support comes in near the $1,460 level at present.

The U.S. Dollar Index also moved decisively, and also to the downside, giving back a significant portion of recent gains during the past week. As has occurred previously, the US Dollar and gold moved in the same direction, much the opposite of the normal historic pattern.

Also moving in the opposite direction from what might be normally expected, the stock markets rallied sharply at the same time interest rates were on the rise.

After months of almost steady decline, 30-year U.S. Treasury Bond interest rates reversed direction during the past week and rose from near 4.14% to slightly above 4.40%, a very significant quick-time move. At the same time, securities markets, as measured by the Dow Industrials, shed any sense of pessimism and rose in dramatic fashion, rising by the greatest one-week amount in over one year, as indicated below.

Many of these moves can be attributed to the news events which followed the rise and fall of the Greek debt crisis. As matters appeared to worsen during the preceding weeks, gold had rallied, panic moves into the US Dollar and US Bonds had taken place resulting in a stronger Greenback and falling interest rates and the securities markets had panicked, falling below the 12,000 level.

Then the international financial community pulled yet another rescue action out of their hat, apparently resolving the Greek debt crisis by plunging that nation even further into the debt abyss, but apparently solving the problems-of-the-moment by adopting the new and popular policy of reacting to serious troubles by finding some temporary solution or, to use the new vernacular, kicking the can down the road.

Given that the crisis had apparently been resolved, the public reacted by selling gold, selling the US Dollar, driving interest rates higher and buying securities in large numbers.

Mining grabbed its fair share of headlines itself during the past week, including the following events:

A major news story relates to developments at Bear Creek Minings Santa Ana silver project. The company had obtained a mining license to proceed with the project in 2007, but in a startling development, the Peruvian government revoked that license last week, citing changing conditions in regard to public protest as the reason.

By taking this action, the government of Peru has cast a shadow over the continued viability of present mines operating with valid permits as well as any company contemplating new or expanded development within that nation. It is also a great concern that Perus newly-elected President has a strong Socialist background.

The mining world got a public relations shot in the arm when the Canadian government reported that the mining industry had been a standout in terms of economic contributions during an otherwise flat First Quarter 2011 GDP report. Mining and energy extraction were the fastest growing segments of Canadas economy, growing by a strong 9.7% annual rate during that quarter. Statistics Canada also reported that mining continued to lead the way during the month of April when it was the fastest growing sector in percentage terms.

In the meantime, undoubtedly as a function of the rapid growth in mining activity, Agence France-Presse news service reported that there is a growing shortage of professional mining specialists developing within the mining industry. The news service recently reported that, ...companies are desperate for geologists, mining engineers, and workers with metallurgical, chemical, electrical, and environmental expertise, as well as good managers... citing McGill Universitys Hani Mitri.

Another story continuing to garner its fair share of headlines is the continuing failure of the U.S. Congress to resolve the Debt Limitation crisis. That legal limit now stands are $14.294 trillion while the actual reported debt has now soared well above that figure.

Fiscal conservatives in Congress are taking a hard line position that the debt has gone far enough and it is time to put harsh austerity measures into effect to prevent any further growth in that number. At the same time, fiscal liberals are stating bluntly that some form of catastrophe will occur unless the U.S. government is allowed to continue to legally expand debt as required to honour previous commitments and insure sufficient liquidity to allow government programs to continue.

There appears to be no give to either side, despite the fact that the U.S. Treasury has issued a drop-dead time limit of August 2 before the U.S. could actually face defaulting on their government debt. President Obama has come out strongly in favour of raising the national Debt limit, stating in public address that the U.S. could face significant and unpredictable consequences on capital markets unless Congress raised the debt limit by August 2. At the same time, the International Monetary Fund (IMF) chimed in by declaring in a Financial Times article, ...The IMF has warned of a severe shock to global markets if the US does not move quickly to increase its borrowing authority...

It is almost as if Congress is headed toward a Mexican Standoff where both sides have dug in their heels and an irreversible deadline is approaching.

Should make for interesting news in coming days and weeks.

We will be altering our Melman Minute schedule slightly this week due to the July 4 holiday on Monday south of the border when all major American financial and commodity markets will be closed. Accordingly, we plan to publish on Tuesday, Wednesday and Friday in the coming week.

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