A Melman Minute — July 20, 2011

Since I will be traveling on another mining assignment overnight Tuesday and most of Wednesday and therefore will be unable to present current market information, I thought it might be worthwhile to use this mornings space in order to discuss some general trends as they have impacted our news background.

Going back to the general principals which guide us, one of the most important is the concept that governments have created the enormous debt problems now staggering one country after another because for decade after decade, they spent more than they have taken in via legitimate taxation revenues. As a result, governments around the world have been forced to borrow money from other governments, various banks, private investors and international credit organizations such as the European Central Bank (ECB), International Monetary Fund (IMF) or the Bank for International Settlements (BIS). That debt has now reached critical proportions as one nation after another is faced with three apparent difficulties:

Their international credit standing has been reduced to junk status

The cost of borrowing funds is steadily rising with increasing interest costs exacerbating their national operating deficits

In several countries, the shoddy state of their national balance sheet has resulted in an inability to borrow needed funds at any price.

On several occasions, I have been asked personally why, as a site based in Canada, The Melman Report spends so much time analyzing the parade of economic and political information emanating from the United States of America. The answer is simple. While many people believe that Canada may indeed be one of the best countries in the world in which to live and I would not disagree with that statement at all in terms of international influence, no single nation holds a candle when compared to the shadow cast by events taking place in the USA. It has the worlds largest economy, the worlds most important financial and securities markets and the influence of the American President on international matters is by far the most powerful of any other individual.

Therefore, when it comes to discussions of topics such as debt, deficits and political trends, we simply find it to be of primary importance to focus on our southern neighbors.

Having said that, we can state clearly that, in our opinion, the collective irresponsibility being shown by the American political establishment in terms of recent debates regarding their Debt Limitation crisis and their ongoing serious budgetary deficits is the primary reason that gold has soared to its present record high above US$1,600 per ounce.

From our point of view, the entire question of future fiat monetary stability boils down to the question being asked in a growing number of circles: Can the USA gain solid control of its financial situation in terms of limiting future debt, future monetary creation and finally, initiating the process of actually reducing its horrendous national debt which presently appears to have nowhere to go but ever-upward. Frankly, the tenor of recent debates in Congress provides little encouragement regarding future progress.

Perhaps the greatest opportunity to finally begin putting Americas financial house in order has been the debates regarding the National Debt Limitation law. According to American law, Congress must pass an Act defining a new debt limit before the size of the American debt can be increased. In present terms, the current debt limit is $14.294 trillion, while the actual level of the national debt is already above that level and, therefore, cries are being raised that the U.S. will be unable to pay its bills unless that limit is raised and the time deadline has been set as August 2, 2011.

From our point of view, the only long-term rational course of action is to finally begin to rein in spending until it drops below the moving target known as revenues. It would appear to us that only that course of action will allow some sort of genuine future stability to take place. We had hoped that the debate would center of serious proposals of that nature, but, regrettably, we must report that despite lengthy and complex discussions, serious proposals to cut back on government have been almost entirely absent from the debates.

Without attempting to appear partisan we would point out that one of the problems during the debates has been the Democratic Party stance on several concepts which have been allowed to set the tone of the debates to the exclusion of other, much more conservative or libertarian ideas. Among those ideas we find:

Reducing taxes is not compatible with sound government

When government spends more than it takes in, the responsible course is to raise taxes

Any politician who proposes any other course of action must be a tool of the privileged or wealthy, or must at least be cold-heartedly willing to see people really suffer in order to impose their cruel policies.

Part of this public relations barrage is the sudden casting of Barrack Obama as the calm center within surrounding turmoil, with the President assuming the role of the great protector of adult behavior inside a pool of panicking politicians. His latest statement that politicians may have to Eat their peas is typical of the kind of guidance he is offering.

As Washington political columnist Gerald Seib put things in a recent op-ed piece, ...Washington now appears to be collectively squandering the opportunity to make something positive out of the crisis...There was a time when it seemed possible, perhaps even likely, that the need to raise the debt ceiling by August 2 would provide the leverage for meaningful, long-term bipartisan action to rein in long-term deficit spending...

However, what he now sees happening is this: ...the passage of a plan that may end up as the bare minimum necessary to get past a crisis point.

Seems to us to be another case of just kicking the can down the road, to be ultimately resolved at a future time when the crisis will likely be even more threatening. It is this growing uncertainty, we believe, which is responsible for the precious metals rallies of late.

One other factor in the precious metals bull markets might be a sudden resurgence of prices in commodity markets in general and we offer two charts to illustrate the point.

After months of uncertain action, the grain markets a very important part of food prices are suddenly heating up, as illustrated by the chart on the September Corn contract.

The same type of action appears to be taking place in the lumber market where a solid bottoming pattern has been forming for several months and where the short term action is also pointing toward the upside.

We could also use the base metals, copper in particular where the price is now within just fifteen cents of its all-time high, to illustrate the point.

We plan to offer a more regular Melman Minute on Friday, July 22, 2011, complete with updated market action. In the meantime, we are off to Eastern Washington State to report on a barite mining operation. While barite is not one of the more common minerals associated with our more normal base and precious metals mining activities, it is not without special interest.

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