A Melman Minute — July 29, 2011

Of all the attributes of gold, one of the least understood or mentioned is that it often functions as a reverse thermometer of societal stability. In other words, as the functions of society appear to be performing in a stable, satisfactory manner, gold usually performs poorly, but if gold is soaring, then the implication is society is heading toward hell in a hand-basket.

For the past few weeks, gold has been soaring and, as of this morning, a new record level has been achieved with the yellow metal trading close to $1,635 early in todays session. If golds role as a negative thermometer has any validity at all, then golds recent actions should be a harbinger of some very drastic times lying ahead, perhaps in the very near future.

With that in mind, please consider some of the following threats to social stability that have been developing in within the very recent past on toward the present.

The US economy appears to be dramatically slowing down once again. The US government just announced that the First Quarter GDP growth rate has been re-calculated downward to show a growth of only 0.4% and the flash estimate for the 2nd Quarter 2011 has come in at about 1.3%. These figures are insufficient to demonstrate any real growth and, with the Unemployment Rate officially set at 9.2%, one can only wonder how high that figure will go in coming months.

Americas national finances are becoming truly chaotic and the people responsible for solving the problems appear to be running around aimlessly, demonstrating that they have no idea how to resolve the looming crises, and we would agree the problems in fact appear insoluble. The US National Debt has reached a monstrous level and cannot sanely be increased. However, the number of people earning their livelihood from government monies is in the millions and rising while the number of people demanding an expansion of government services is likewise in the millions. Politically, the country is damned if it shuts the door on these people and financially, it is damned if it keeps the doors opened.

Europe appears to be headed toward an even higher crisis level. Not only is one country after another finding itself unable to handle its indebtedness in a responsible manner, namely by paying interest and re-paying principal out of legitimate current revenues, but the very currency structure of the entire multi-nation European Economic Community is at hazard as one international agency after another is being called upon to support these caving-in nations without the slightest serious discussion regarding how these borrowings are ever to be repaid. In our opinion, this is placing the Eurocurrency itself in danger of default by declining toward worthlessness.

The gulf between the Right and Left appears to be widening, not narrowing as appeals for partisan support are intensifying. This is true politically as the political Left is having marked success in blaming economic right-wingers for kowtowing to millionaires and billionaires and it is also true in the sense of the Radical Right being a title for extreme nationalism, as exemplified by the Norwegian slayings of the past week. We believe these gulfs are making it more difficult to seriously alter the dangerous paths on which many countries have embarked.

Indications are growing that international terrorism is once again on the rise. Reports now coming out of the U.S. Treasury show that money and goods aimed for Al Qaeda are being transported within Iran for eventual trans-shipment to that organizations facilities in Pakistan and Afghanistan and it is also rumoured that new training facilities for terrorism are being built within Iran. Iran is now the worlds largest financial supporter of terrorism and is also in the process of dramatically expanding its weapons-grade uranium manufacturing facilities.

These are only some of the major problems facing the world, and, sad to report, we find fewer and fewer actions at virtually any level which appear to bode well for social stability in coming years.

As if to underscore the growing sense of futility worldwide, President Obama made what was billed as a major address this morning at about 7:40 AM PDT. His well-publicized original schedule called for the address to take place at 7:20, but minutes dragged by without the White House offering any reasons for delay. Then, when Obama finally began to speak, he said virtually nothing about the actual Debt Limitation Crisis other than it was time for dedicated bi-partisan action, but he failed to offer a single specific measure which might have offered some ray of hope of ever reversing the tsunami of indebtedness overwhelming the financial structures of America.

It isnt only the President who appears to be unable to think in terms of solving Americas debt problems by any measure other than acquiring new mountains of debt. Noted Vermont Senator Bernie Sanders just authored an Op-Ed piece in which he accused Congress of trying to balance the budget ...on the backs of the elderly, the sick, children and working families. He also accused politicians of pandering to the rich and powerful. His answers sounded so very typical, calling for new taxes against the wealthy and capitalists in general while insuring that massive programs involving, ...education, health care, nutrition, affordable housing, child care and many others... should not be cut at all.

We found Sanders comments to be of particular interest because they exemplify much of the commentary now being circulated around that nation. One can only wonder if the good-hearted Senator and his allies have their heads buried in the sand. What other explanation is available to explain how they can fail to realize that their policies and goals are precisely the source of so many of Americas and the worlds current difficulties?

The problem is hardly limited to the USA as illustrated by laws recently enacted by Perus government headed by their new President, Ollanta Humala. Among his first accomplishments were bills to raise the minimum wage by 25% in two stages as well as a guarantee to increase the countrys pensions. While he never addressed the question of where the revenues for this increased spending were to come from, commentators quickly suggested that increased taxes on capitalists in general and the mining industry in particular would likely be forthcoming.

He also made a particularly ominous announcement for the mining industry, pointing out that he would act according to the 1979 constitution of Peru, effectively voiding the Constitution of 1993 instituted by then-President Fujimori. If that change indeed takes place, then it would appear that all agreements which took place from 1993 through the present time would be placed into some degree of uncertainty while jurists attempted to discover which set of laws are now to be followed.

One chart, the two-year Dow Industrial Average, is now giving us pause for concern as it appeared to have completed forming a head-and-shoulders top formation, with the left shoulder occurring in February 2011; the head in late April and the right shoulder in early to mid-July. A clear neckline can be drawn between the bottoms of March and June and presently comes in just below the 12,000 zone.

We would suggest that if the Dow Industrials break down below that neckline and then fail to find support at either 11,800 or 11,500 then a major top would likely have been formed, with potentially serious downside implications. One other negative consideration is that the long bullish trend line starting from the lows of March, 2009 now also comes in just below 12,000, adding further negative implications should a break to the downside occur.

As of 9:45 AM PDT, precious metals markets have declined somewhat from their peaks, but still show good gains on the day with gold holding near $1,625 and silver trading just below $40.00 per ounce. Base metals are trading moderately lower on balance while mining share indexes continue to seriously under-perform the metals markets in general with the XAU and HUI both down another two percent on average. Financial markets are somewhat improved from their lowest levels, but are still down on the day with the TSX Index off by about 100 points while the Dow Industrials are down by around 60.

In other markets, long-term interest rates are sharply lower, crude oil is down by about $2.00 per barrel and the US Dollar Index is off by about 40 basis points.

All quotes US$ unless otherwise indicated.

Our next Melman Minute is scheduled for Tuesday, August 2, a slight revision from our normal schedule due to the Canadian national holiday on August 1.

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