A Melman Minute — July 22, 2011

Every so often, a political or international financial leader says something that perhaps provides a little more information to the public than might have been intended. I believe such was the case with a self-congratulatory statement from the IMF which was printed in The Times of London newspaper this morning. Referring to the success of the new plan to rescue Greece, the Times provided us with this juicy tidbit of a quote:

Christine Lagarde, the IMF managing director, described the decision at the emergency summit to support a country in difficulty until it could return to the markets to raise finance as game-changing. (Our emphasis)

Quite frankly, what Ms. Lagarde was admitting to was that the preferred solution to the Greek crisis - which has been caused by overwhelming levels of debt - is to create a situation which will tide the defaulting nation over until it can borrow more money on its own merits. What is of the greatest importance is what was left out of the IMF message. There was no discussion whatsoever of Greece actually repaying any of its debt; only how it might borrow more into the future.

Apparently, that is what now stands as a solution to national and international financial problems. When you think about it, that is precisely what President Obama and his minions are prescribing for the United States, saying, in effect, that all that is needed to somehow restore confidence and stability is for Congress to enable the government to continue spending, borrowing and building up additional debt into the infinite future.

Perhaps that is why gold has been able to fend off all recent attempts to drive the yellow metals price downward in the past two weeks. Every attempt to do so has been met with solid buying which has enabled gold to hold near the $1,600 level despite all the successes announced by European and North American negotiators.

Its strange how some words become popular for a while and then subside into disuse. In our recollections, one of those words is specificity. It originally came into popular usage during the impeachment hearings of Richard Nixon back in the days of the Watergate hearings which ultimately culminated in his resignation from the Presidency, the first such resignation in American history.

Nixons lawyers continually stated that the charges against Nixon lacked specificity, meaning they were too vague. Their strategy was to limit the scope of the hearings by raising the level of specificity and thereby restricting the flow of information. The policy almost worked, but then came the revelations regarding the White House tapes and it was the non-deniable nature of that evidence which finally brought down the President.

It seems that in both of todays major financial and political crises; those relating to the potential default in Greece and the looming Debt Limitation deadline of the USA, the word specificity or, in this case, the lack of same, is once again in play. In our interpretation, this lack of specificity is raising the level of future uncertainty and that is redounding to the benefit of gold. Here is our line of thinking at The Melman Report.

First, lets take a look at the European fiasco in terms of specificity. We are told that a rescue plan is now in effect, which will call for some sacrifice on the part of private bondholders of Greeks government debt. We are told that the sacrifices will call for an extension of time involving a re-write of such debt. However, what we are not told is how much of the debt will be re-written, exactly how long will be the term of the extension and exactly which group of present bond-holders will be the ones to suffer through this undefined haircut.

However, what we are being assured is that, as noted above, somehow the imposition of massive amounts of new debt, thanks primarily to the enforced generosity of German and French taxpayers, will enhance the ability of Greece to borrow more money over time, thereby assuring that all present bondholders will ultimately get their money and that assurance is also to be applied to the debt of Portugal, Ireland, Spain and Italy.

The non-specific nature of all these plans and the unwillingness to describe anything in specific detail is well illustrated by a comment to the press from Herman Van Rompuy, European Union President, who noted,

...We created a solid firewall and better fire-brigade equipment.

On such vague promises, we are being assured that the European debt crisis has been resolved.

What is happening inside the USA is just as non-specific, just as nebulous.

There are three important influences on the course of the debate to resolve the debt limitation crisis by August 2 the date imposed by the U.S. Treasury, which used smoke-and-mirrors accounting to extend the dilemma to that date. The three powerful influences are the House of Representatives where the Republicans are in control; the U.S. Senate where Democrats are in control; and President Barak Obama, a strongly partisan Democrat.

Unfortunately, nothing but a profusion of plans, none of them identifying clearly what path will be followed in order to accomplish their goals, has been pouring forth from all three sources. In a national television address this morning, even the President admitted to the confusing array of items under discussion but then failed to add any specific information himself, confining his comments to impressive-sounding generalities which made it appear that something would be done, but never stating exactly what.

We have heard that taxes are to be raised on the very rich, but the amounts being proposed would have little impact on deficits of one trillion dollar per year or more. We also hear of cuts in spending amounting to over a trillion dollars but that figure is for a ten-year period when the problem is immediate, and we have yet to be told exactly which spending programs will be cut or by how much.

We are told that Democrats generally favor more taxes on the rich while Republicans generally favor more program cuts, but no one will tell us exactly whose taxes are to be raised or whose favorite programs are to be abolished.

The general state of affairs regarding these debates can be summed up in a quote from this mornings Wall Street Journal which reads, ...Even while their subordinates have proposed various plans in recent weeks, Messers Obama and Boehner continued to voice hopes for a more sweeping agreement. The two leaders want a package that could cement their legacies by tackling the governments long-term fiscal woes.

There was not one word in this quote or any other article we have seen this morning from either gent about exactly how this goal was to be accomplished.

Gold feeds on uncertainty and, as can be seen on the very short term charts, todays markets have provided a happy feeding ground, with gold once again trading above the $1,600 level.

As of 9:30 AM PDT, financial markets are taking different directions as they digest the varying news accounts emanating from Europe and North America, with the Dow Industrials off by about 30 points while Canadas TSX Index has benefitted from stronger commodity prices, rising by about 70 points. Precious metals continue to trade higher with gold just above the $1,600 mark while silver is trading near the $40 per ounce level. Base metals have moved moderately higher on balance while mining share indexes have gained about 1%.

In other markets, crude oil is once again approaching the $100 per barrel level; the US Dollar is trading close to unchanged; and long term interests rates have declined slightly.

All quotes US$ unless otherwise indicated.

Next Melman Minute scheduled for Monday, July 25, 2011. Should be an interesting weekend between now and then.

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