A Melman Minute — October 12, 2011
| By | Leonard Melman |
|---|---|
| Date | October 12, 2011 |
Strong buying in gold and silver during the overnight hours has resulted in sharply higher openings in North America this morning. Gold has surged by almost $30 and is once again approaching the $1,700 level while silver has added about 80 cents and is again near $33.00. However, a look at both charts might give us a little pause before uncorking the Champaign bottles in celebration of renewed short term bull markets.
Please note that gold’s all-time high is in the $1,920 zone while the recent low was approximately $1,540, a decline from the peak of about $380.00. Therefore, all gold has accomplished is a recovery of slightly less than 50% of the preceding decline – a normal rebound from compressed selling. It is also worth noting that the chart of gold is also encountering an area of resistance just above the $1,700 level at a previous trading low.
While the rally from $1,540 in the December 2011 commodity contract has indeed been encouraging, we believe gold must exceed short term resistance between $1,700 and $1,740 before the technical picture can return to a truly bullish mode.
The December 2011 commodity contract for silver offers a similar picture. The preceding decline in silver carried from about $44 per ounce down to $26, a drop of $18 and so a 50% rebound would approach the $35 level, which is slightly above where silver stands this morning. In a manner distinctly similar to gold, in our opinion silver must break above the $35 - $37area in order to turn the short-term outlook bullish.
President Obama’s $445 billion “Jobs Bill” seems to be ‘dead in the water’. Voting precisely along party lines, the Senate voted 50-49 in favour of the bill, but 60 votes were required in order to move the bill forward in that body. Given the high likelihood that the Jobs Bill will be rejected in the House where Republicans hold a solid majority, the future of Obama’s bill is in doubt. Many observers believe that Congress will next begin to evaluate each portion of the proposed legislation, rather than attempt to pass it as a whole.
From our point of view, we believe that passage of the Jobs Bill as proposed would have created more difficulties than it could have possibly resolved, including adding further complications to an already-complex massive body of tax laws. It would also have taxed those who contribute most to the private, free economy and would have added further psychological incentives for those already on unemployment insurance to remain unemployed in order to continue receiving benefits which were scheduled to be extended into the months and years to come.
In our view, America – as well as many other nations in the world – is hindered in its ability to expand economically by a body of regulations that has grown to gargantuan size and, in fact, has long since passed the point where anyone even knows which laws exist. Under such a circumstance, we believe it is becoming increasingly impossible for businesses to efficiently plan into the future with any degree of certainty and that is having the consequence of diminishing profitability, diminishing government tax receipts and increasing the likelihood of massive budgetary deficits into the almost infinite future which, in turn, will further the creation of fiat currency, printed or electronic.
Based upon such reasoning, we believe a crisis in the Greenback is approaching, a crisis we believe will be positive for the monetary precious metals over time.
In the meantime, confusion over Europe’s monetary future continues to escalate. In the latest instance, Slovakia voted against approving a plan to expand the “European Financial Stability Facility” (EFSF) which has been set up in order to allow the European Central Bank to buy up private bank’s questionable national debt receivables. Many regard expansion of the EFSF as an essential component of any genuine ‘rescue’ effort for Europe’s major banks.
Slovakia’s action caused recently robust financial markets to pause yesterday, but during our overnight hours Slovakia announced that a means might be found to bring about a re-vote and so European markets have surged and this buying has carried over into Canada and the USA at their openings this morning.
Regrettably, we must catch an early ferry to Downtown Vancouver to take part in several business meetings and must cut these musings short.
As of 6:35 AM PDT, both the Dow Industrials and Canada’s TSX have opened higher with the Dow trading about 60 points higher while the TSX Index is up by a similar amount. Gold and silver have retreated slightly with the yellow metal near $1,680 and silver trading at $32.50. Base metals are higher on balance and mining share indexes have opened to the upside by about one percent.
In other markets, the US Dollar Index has declined to below 77.50, crude oil is close to unchanged and long-term interest rates have moved moderately higher.