A Melman Minute — September 7, 2011

Several issues past, we noted a trend which was becoming apparent and recent events appear to be confirming its continuing existence. We are referring to a pattern of heightened impending crisis which brings about steep market declines, rising gold prices, strength in the US dollar, declining interest rates and falling commodity prices. The next stage occurs when the seemingly inevitable crisis suddenly abates and we witness precisely the opposite market moves; rising securities markets, falling gold, falling US Dollar, rising interest rates and rising commodity prices.

We are now witnessing the latest version of that pattern. Over the past weekend, fears of an imminent collapse of the Euro roiled both emotions and markets over the past weekend and financial markets opened Monday with a sickening thud. True to the picture, gold soared, the US Dollar soared, interest rates fell (to historic record lows!) and crude oil, among other commodities, fell sharply.

With startling suddenness, emotions changed direction yesterday and, after opening lower, financial markets suddenly began to rebound, gold began to fall, the US Dollar reversed its previous rally, interest rates moved off their prior lows and crude oil prices began to recover.

This morning, it appears that optimism has temporarily been fully restored and every one of our predictable patterns is falling into line. Immediately after their openings, we note the following price changes:

Financial markets are moving sharply higher with the Dow Industrials opening ahead by over 140 points.

Gold has plunged by as much as sixty dollars an ounce.

The U.S. Dollar Index is off by more than 20 basis points.

Long term interest rates have moved higher.

The price of crude oil, the most widely played commodity, is up by almost $2.00 per barrel. Other seemingly unrelated commodities such as cotton, grains, coffee, sugar and lumber are all headed higher as well.

When we try to identify reasons for this sudden and stunning “reversal of fortune”, there are a few news items which might help provide an explanation. In that category we might include optimism over the contents of Barak Obama’s forthcoming economic address to Congress tomorrow night; action by the head of the Swiss central bank to cap the value of the Swiss Franc; and a German court upheld the creation of the European Financial Stability Facility.

And so, with another apparent crisis resolved, markets have taken off in their predictable combinations which relate to growing optimism in place of dark pessimism. Of course, it goes without saying that pessimism could return at any time. That has been the fluctuating pattern of late.

In terms of chart action, gold now appears to be trading within a new range with the top just above $1,900 and the bottom near the panic low of a few days ago at $1,700. In our opinion, both intermediate and long term trends remain bullish.

We hate to sound sceptical in the face of such blatant optimism, but to our jaundiced eye, advance word on what the President will propose seems to us to be nothing more than another dose of “same old – same old.” According to Bloomberg News Service, Obama will propose yet another stimulus program, this one involving $300 billion to $400 billion in tax cuts, infrastructure spending and aid to state and local governments. Of course, such infusions are predicted by Keynesians to ‘create’ jobs, as if they will fall from trees like ripe apples.

An obvious question suggests itself. If it was that easy, if all that was required was for government to spend enough artificially created ‘money’, then why hasn’t unemployment already plunged toward virtual nothingness, given that a historic array of such stimulative measures has already been enacted?

Another obvious question is exactly where these additional hundreds of billions of dollars are to be found. The budget is already in deep deficit and the economy cannot stand further tax increases. Therefore, we believe there is only one new source for these funds and that is additional monetary creation by the Fed in the form of more purchases of government debt instruments with printed or electronically created funds.

In our opinion, this style of financial management will be bullish for the precious metals over the long term, despite the gut-wrenching short term fluctuations we witness from time to time.

As of 7:00 AM PDT, financial markets remain on the plus side with the Dow Industrials up by about 160 points while the TSX Index, somewhat held back by declining gold and silver, is ahead by about 60. Gold is down dramatically, off by as much as $65 to just above the $1,800 mark while silver has fallen below $41.00 per ounce. Base metals are rallying with other commodities while mining share indexes are down by about 1.5 to 2%.

In other markets, crude remains near the highest levels of the day, the US Dollar is still lower on the session and long term interest rates have moved upward.

All quotes US$ unless otherwise indicated.

Next Melman Minute scheduled for Friday, September 9, 2011 when we will have an opportunity to report on President Obama’s speech to Congress Thursday night.

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