A Melman Minute — July 6, 2011
| By | Leonard Melman |
|---|---|
| Date | July 6, 2011 |
MID-YEAR REPORT CARD
The first half of 2011 is now fodder for the history books of the future, so it seems appropriate to take a look back at our annual forecast, issued at the end of December 2010, and see if it requires any substantive revision. Here is what we wrote in our Melman Minute of December 30, 2010:
When we look forward into 2011, it seems that while continuing economic problems such as housing and unemployment, growing inflationary threats and the possibility of major interest rate increases will indeed be important considerations, it appears to us that the dominant force (on gold) will be two sides of the same coin.
The first side of that coin we believe will be an accelerating loss of faith by the general public in the ability of governments to manage the world's economies. This we believe will include a growing consensus that Keynesian remedies (direct and sometimes aggressive intervention by government into economic structures) will no longer work, if they ever truly did.
The second side of that coin, we believe, is that increasing numbers of people, having lost faith in government remedies to protect currency values and economic structures, will turn to the monetary precious metals and other tangible items in order to preserve asset values. As noted in our recent "Melman Minutes" of December 28 and 29, we believe the fires of both tangible and food inflation are glowing ever-stronger, but in our opinion, it is this anticipation of loss of faith in government's ability to manage monetary matters that will provide the major stimulus for the precious metals.
Accordingly, we come up with these predictions for the high prices of all three metals during the coming year, with their peaks all arriving late in 2011:
Gold - $1,850
Silver - $40.00
Platinum - $2,300
Frankly, after reviewing the concepts underlying these predictions, we would change very little, even though the forecast for silver turned out to be leagues short of that metals actual performance. However, it is quite possible that silver simply got ahead of itself and the return to the lower to mid-30s is more consistent with its real long term price movements.
The main theme we forecast was a gradual erosion of confidence in the ability of the worlds political and financial leadership to micro-manage the worlds economies successfully and we certainly have been receiving and endless array of information which appears to confirm this concept.
Americas deficit is huge and growing. Americas political leaders from both major parties cannot agree in any substantive manner how to go forward. Europes Central Bank is floundering under the impact of virtual defaults in Greece and Ireland and just yesterday, Moodys bond rating service dropped bonds issued by Portugal into the junk bonds category.
And so, we will stay with our forecast, knowing full well that matters may not progress exactly as we have predicted, but having faith that we remain on the correct track as events of the second half of 2011 begin to unfold.
Of course, one of the basic questions which must be answered is what is the basis for believing that gold has any special place in the financial affairs of mankind? After all, didnt the great Lord Keynes declare that it was just a barbarous relic?
A portion of the answer has just come from the previously undiscovered vaults of the Kerala Temple in India. During the past week, an enormous body of treasure was discovered there which has an estimated value of over $20 billion. Most of the treasure had lain dormant for over a century and, for our purposes, one of the most interesting features is that it is comprised in the most part of gold artifacts and coins, some bags dating back to the early 18th century and therein we find one of the chief virtues of gold holdings.
The gold coins today are still of substantial value, which would not be the case if the bags had containing paper money of the era, which today would have only museum or curiosity value. But the gold, despite having lain dormant for hundreds of year, is still worth a mighty fortune.
This is not the first such occurrence. Almost one century ago, the tomb of King Tut was discovered and it was filled, among other things, with golden artifacts, golden coffins, gilded statues and golden burial masks. All of them remain valuable after thirty centuries.
In 1978 a treasure trove similar to Kerala was discovered in Afghanistan which dates back to the time of Alexander the Great, almost twenty-four centuries earlier. Like King Tuts tomb, it was also filled with golden artifacts which, of course, have great worth today.
In 1988, a team of archaeologists discovered another treasure trove in Iraq, estimating that it dated back to the Assyrian times of the Bible, well over twenty centuries past. That trove also contained golden jewelry and golden ornaments again having great value today.
The same concept holds true of Spanish golden coins found on ships which sank in the Caribbean Sea or the Atlantic Ocean four and five centuries previously. Those coins consistently have endured all those centuries in the depths under salt water without deterioration, without loss of value.
Occurrences such as these have proven, time and time again, that gold possesses the attribute of maintaining significant value over time, something which cannot be said of unbacked, fiat paper money where every such issuance has eventually deteriorated throughout history into virtual worthlessness.
Strange, isnt it, how that barbarous metal seems to remain eminently desirable century after century after century, right to this very day?
Speaking of gold retaining its desirability, just when it appeared it might be in for some substantial selling, buyers came out of the woodwork, and, as of 9:30 AM PDT, gold has risen by over $50 during the past two trading days and, as can be seen, it has moved back to near $1,530, placing it toward the middle of its recent trading range, bounded by $1,577 on the upside and about $1,460 to the downside. Silver is also rallying strongly, having recovered to just above the $36 mark, but, as can be seen on silvers chart, it has a much greater percentage distance to travel than gold if it is to break above previous record high levels.
Base metals have actually traded lower so far on the session and mining share indexes have returned to close to unchanged after posting earlier gains.
In other markets, the US Dollar is moderately higher with the DX Index having returned to the 75 level; crude oil is holding in the upper $96 range; and long term interest rates are close to unchanged in todays trading.
All quotes US$ unless otherwise indicated.