A Melman Minute — July 13, 2011

Somewhere just after 6:00 AM PDT, the price of gold passed another milestone, trading for the first time ever in excess of $1,580 per ounce on a major commodity exchange. The chart clearly shows the breakout above the May 2, 2011 high of just under the $1,580 mark. What we cannot know is just how powerful this breakout will turn out to be; whether it is just a flash in the pan to be followed quickly by renewed selling, or whether it is a prelude to much higher numbers for the yellow metal. Time will tell.

It is worth noting that silver appears to have enjoyed a resurgence of its own and is up almost $2.00 per ounce this morning alone a huge move in percentage terms for the white metal. While the rally has not set a new historic high, it has provided silver with its highest quotes in many weeks, itself a bullish sign.

One other chart is worth noting on this day of at least semi-celebration for the metals and we are referring to the recent strong action in the XAU mining share index. Earlier this year the shares had been dramatically under-performing the price action in the metals themselves, but that has changed significantly during the past few weeks and major mining share indexes have been posting powerful gains of late a bullish sign for both the shares and the metals.

Perhaps the biggest driver for the precious metals is the deteriorating status of Europes debt structure as one nation after another continues to be racked by negative headlines and this morning has been no exception when we note this dandy: Irelands Bonds Downgraded to Junk. The headline refers to the fact that Moodys Investor Service had just placed Irelands national debt rating to Ba1, down from Baa3. Any rating in the Moodys system lower than two as is regarded as below investment grade status.

Our own view is that the debt situation in several European countries may well have passed a point of no return. They clearly cannot continue borrowing and spending in the wild manner that has become their custom in recent years. However, any attempt to radically cut spending is bound to crash on two reefs. First, the social reaction against any true austerity measure will likely be severe and perhaps uncontrollable. Next, even if austerity can be imposed, that would mean cutting back the number of government workers and the number of government cash recipients thereby slowing economic activity just when prosperity is necessary to throw off greater taxation revenue.

The same kind of problem exists in America where the national debt has ballooned to almost $14.5 trillion more than $200 billion in excess of the so-called legal limit. However, despite the seriousness of the situation, politicians are loath to cut into any popular spending programs while the economy is once again sputtering.

Regrettably, we have to catch an early ferry to attend meetings in Downtown Vancouver and so must cut short these musings.

As of 7:20 AM PDT, gold and silver continue to rally with the most recent quotes showing $1,582 for gold and $37.63 for silver. Base metals are trading higher across the board and, not surprisingly, mining share indexes are making strong advances as well. More surprisingly, financial markets are also rallying strongly with the Dow Industrials ahead by over 130 points while Canadas TSX Index is ahead by a similar amount.

(A late story tells us that Fed Chairman Bernanke has admitted that the Fed will resort to more stimulation if the economy requires such action. All we can say is, hang on to your inflationary hats.)

In other markets, interest rates are trading close to unchanged, petroleum is slightly lower and the US Dollar is also down in currency action.

All quotes US$ unless otherwise indicated.

Next Melman Minute scheduled for Friday, July 15, 2011.

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