A Melman Minute — July 25, 2011

It has been our pleasure to have been commenting, in one way or another, on political and economic events and how they have affected our world of precious and base metals mining for almost four decades. During all those years, we can never recall a period when so many events of potentially cataclysmic and we use that term advisedly events have been taking place virtually simultaneously.

In some ways it reminds me of the lyrics in a song from Cabaret, where the night club host portrays himself as the lover of a lady who is talented, but scorned, for reasons which are explained in an obvious manner during the song. However, the line that resonates with us this morning is:

How can I speak of her virtues, I dont know where to begin

Shes clever, shes smart, she reads music; she doesnt smoke or drink gin...

Like the singer in that song, it is truly hard to know where to begin when constructing a list of problems that could envelop societies around the world. However, given the timeliness of the moment, the massacres in Norway seem to have the greatest importance.

For those who have been traveling on the surface of the moon, or some such other isolated location, a quick review of the facts is in order. A lone man, who has been described as a Radical Right Wing Terrorist, first detonated a bomb near a government building in downtown Oslo which killed seven people, then traveled to a youth camp on a small island just off the Norwegian coast and there he killed approximately 90 young people via rifle fire. A picture posted on the worlds media showed him armed with a weapon that could only be described as ultra-sophisticated.

Before proceeding any further, let me state clearly, for myself and this site, that murderous violence of the sort just perpetrated in Norway is NEVER to be condoned, nor will I make any attempt to do so. However, the murderer, Anders Breivik, did something most unusual before he went out and inflicted so much terror. He left behind both a 12-minute video and a 1,500 page Manifesto in which attempts to explain the reasons for his actions.

He pointed toward two specific situations which he regarded as mortal threats to the future existence of a free Europe; what he regarded as the growing influence on the European culture of a Marxist-inspired multiculturalism and his belief that Europe is now increasingly vulnerable to a genuine Islamic takeover of Europes political systems.

While virtually no one could ever support Brieviks actions, it may very well be true that many share those two core beliefs and, from our point of view, this action could become the inspiration for other such actions and, if this becomes true, then the stage might be set for further rallies in gold and silver as fears regarding social stability grow into the future.

It is interesting to note that Brieviks solution to this problem is the re-birth of the ancient Knights Templar a group that has been out of existence for seven centuries,

Two other areas of interest to which we have devoted much of this space for the past several months are the apparently insoluble problems relating to both the American governments financial structure and the various crises threatening the very existence of the European currency.

Dealing with America first, we have the entire American political system scrambling to find a solution to an apparently irresolvable problem. In just eight days, on August 2, 2011, the American government will find that it has insufficient funds to cover a portion of its bills which will be coming due on and after that date as the National Debt has now surpassed the National Debt Limit and all the smoke-and-mirrors accounting ploys will be used up by that date. Either a new debt limit will be passed or the country will move into a period of genuine danger that it might actually default on some portion of its mammoth government debt instruments, a situation which we believe could easily throw the worlds financial markets into turmoil which could lead to rapid decimation of the Greenbacks value and a commensurate surge in golds value.

The problem is that there seems to be no area of give in the positions of both Republicans and Democrats in the US Congress as the debate approaches the deadline. In simplified terms, the Republicans are insisting that there be no new tax increases of any sort and that the problem be resolved primarily by specific and identifiable cuts in government spending. In equally simplified terms, the Democrats are stating they will not endorse any plan which does NOT include tax increases or which includes unduly severe cuts in government programs.

Both sides have set their positions out in the strongest terms and it is difficult to see, at this late moment, where either side can cave in to any extent without appearing to betray their strongly-stated principles. And so, the deadline nears, and markets are growing increasingly fearful of the consequences should an agreement not be signed and enacted.

An illustration of the enormity of the problem can be found in comparing the size of the American National Debt to their economic output as measured by the GDP, or Gross Domestic Product. In 1981 just three decades ago the GDP was $3.126 trillion while the National Debt was almost exactly $1.0 trillion, the ratio of debt to productivity then being 31%. In 2011, the comparable figures are GDP of approximately $15 trillion versus Debt of $14.3 trillion, or a ratio of about 95%! Most economists believe that any ratio above 70% can be an early warning sign of severe debt-servicing troubles.

Things are not one iota better on the European continent. Not only are they facing the two underlying societal problems noted above, but the entire economic structure of the European Economic Community, its European Central Bank, and its Eurocurrency are coming under relentless attach from many sources simultaneously, most notably from Greece, Ireland, Portugal, Spain and Italy.

All of those nations have already either received assistance to prevent debt defaults or appear close to making such pleas. Much worse, each of the five nations has a debt-GDP ratio even worse than America and not one single one of them appears to have a believable plan to restore financial order and stability over the next several years. In addition, several other important European nations such as France, the U.K. and Belgium are also operating under ominous debt- to- GDP ratios.

As if that array was not sufficient to rouse feelings of uncertainty, a specific category of bad news has suddenly begun to re-emerge onto the scene and we are referring to the jobs cuts announcements which have suddenly begun to occur with growing frequency. Canadian electronics producer Research in Motion (RIM) has just announced it will be laying off 11% of its workforce due to declining market penetration of its Blackberry cell phone line. RIM thus joins a growing list of companies including CISCO, Lloyds of London, Panasonic and Quantas Airlines which have made similar recent announcements.

While the roster of companies announcing job cuts is nowhere near the crescendo reached in later 2008, it is nevertheless disturbing for a time period during which a strong recovery should be taking place.

As of 10:00 this morning, gold continues to rally to one new record high after another, this mornings peak trading coming near $1,624 while silver has once again risen above the $41.00 level. Financial markets have rallied somewhat from earlier selling waves and both the Dow Industrials and the TSX Index are each off by about 30 points. Base metals are off by about 1% on average and mining share indexes have turned slightly to the downside.

In other markets, crude oil is holding just under the $100 per barrel mark, the US Dollar is a bit weaker in currency markets and long term interest rates have traded to the upside in quiet trading.

All quotes US$ unless otherwise noted.

Next Melman Minute scheduled for Wednesday, July 27, 2011.

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