A Melman Minute — September 2, 2011

It appears that after several months of seeming disjointed action where many market moves did not follow a normally predictable path, we have finally entered a period when market reactions are beginning to make at least a modicum of sense. The pattern we are beginning to observe is this: when bad American economic news hits the airwaves, financial markets begin to sell off; there is a sudden move into the Greenback, driving the dollar higher and interest rates lower; financial markets drop sharply and, as a result of anticipation of further strong ‘stimulative action’ by government, possibly including new versions of QE3, QE4, etc., gold and silver move higher. In addition, as the Greenback moves higher, prices of some commodities priced in US Dollars fall sharply, also influenced by reduced economic expectations.

This morning has provided us with an example of all those forces moving in unison. At 5:30 AM PDT, the US Department of Labour released the August job figures and they were dismal, to put things mildly. Not only did the new jobs figure for August come in at ‘unchanged’ – no job growth at all – but the Department also reduced the number of new jobs reported for July by about 30,000. Market reactions were virtually instantaneous!

First, financial markets plunged, with the Dow Industrials opening about 200 points lower (see chart).

Next, the US Dollar Index rose sharply, soaring from yesterday’s close at 74.57 to as high as 74.87 and then, gold took off like a shot, rising swiftly by about fifty dollars per ounce (see chart) and is now once again very close to historic record high levels.

Other important indicators fell right into line as U.S. government debt paper was bid higher, dropping long term, 30-year interest rates to below 3.4%, the lowest such figure since 2008 (see chart), and the price of crude oil plunged by as much as $3.00 per barrel.

Long term readers must be aware that we are no particular fans of the Obama Administration’s lack of decisiveness when it comes to economic action, but even we were stunned at the collapse of his personal approval ratings, along with huge declines in the general perception of government among the American public.

It is easy to recall the vitality with which the slogan, “Yes, We Can” was repeated over and over again by Team Obama during the 2008 Presidential election campaign. The public was assured, over and over again, of how the government was going to ‘create’ jobs by the millions, rescue home owners who were in over their heads, provide socialized medical care for masses, closely regulate banking and industry and, somehow, punish all those ‘millionaires and billionaires’ to the benefit of the ordinary population.

Well, quite frankly, the American people are stating loud and clear that it hasn’t worked out as promised. Not only have the President’s personal approval ratings dropped to below 40%, but a Gallup Poll released yesterday shows that the public’s faith in the integrity and effectiveness of government has plunged to the lowest level ever recorded by the Gallup organization. Only 17% of the public still holds to a positive view of government while 63% now hold to a negative view – a stunning difference of negative 46%!

Even worse, when compared to various other categories such as auto manufacturers, retailers and the oil & gas industry itself, government’s approval rating of -46 came in at the bottom of the list, even below the oil & gas industry’s -44%!

Gallup’s results were confirmed by other polls as well with the Washington Post (a very left-leaning publication) and Pew Research Center’s polls returning similar numbers. As the Wall Street Journal summed things up, “...All of this is a stunning rebuke to the President who rode into Washington planning to rehabilitate confidence in government as a means of advancing entitlements and transfer programs. As Mr. Obama mused during the primaries, he envisioned himself as ‘Ronald Reagan in reverse’.

As you might recall, the late President famously said, “...government is the problem, not the solution.” Obama is attempting to prove otherwise, trying to demonstrate that government is truly the source of important solutions to societal and economic problems. If the poll numbers cited above are any indication, he is not enjoying much success in that venture.

The problems associated with monumental government intervention are being felt in other nations as well. Despite huge inputs of government monies, despite massaging of government regulations, despite promise after promise to correct all their problems, the Greek government acknowledged that their economy remains in a state of virtual collapse, now forecast to CONTRACT by about 5% during 2011 and they just raised their forecasts for this year’s budgetary deficit to a horrendous 8.5% of GDP. In other words, despite the intervention of virtually every international financial body and despite the in-pouring of literally hundreds of billions of Euros, Greece continues to be an economic basket case.

There are other articles this morning which add to the same general story, namely that despite all the governmental efforts of bureaucrats around the world, manufacturing is either slowing its rate of growth or is in actual decline in many nations, most countries’ budgets remain solidly in deficit, and the believability of the entire world of international currency manipulation is in tatters.

That plays well into our perception and belief at “The Melman Report” that the greatest underlying force which is gathering strength and working in the precious metals favour is the stunning increase in the number of people who have lost their faith in governments’ abilities to positively resolve problems. If they lose their faith in governments, then it seems reasonable that those same people – or at least a significant number of them – will lose their faith in the tidal wave of fiat, unbacked currencies which have only government’s promises to back them up.

Therefore, it seems reasonable to us that those disillusioned masses will turn in ever-greater numbers into the arms of gold and silver for economic shelter. We have seen gold rise to $1,900 from barely $250 in just one decade. What can possibly lie ahead?

Trading volume is slowing rapidly as the Labour Day weekend approaches and, as of 10;00 AM PDT, financial markets remain lower with the Dow Industrials down by about 180 points and the TSX Index is off by about 60 despite strong rallies in the precious metals. Gold is currently ahead by about $50 to near $1,880 while silver has reached the $43 level. Base metals are moderately to the downside on balance while mining share indexes are about 2-2.5% higher.

In other markets, long term interest rates remain lower, crude oil is still off by almost $3.00 per barrel and the U.S. Dollar Index is holding on to solid gains.

All quotes US$ unless otherwise indicated.

Thanks to the closing of financial markets on Monday for the Labour Day Holiday, our next scheduled “Melman Minute” is planned for Tuesday, September 6, 2011.

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