A Melman Minute — February 9, 2012

It seems to us that in one particular manner, the year 2012 has not started with a "bang", but rather with some sort of "slither". After two or three years of dynamic, fast-paced international financial action, financial news during the early part of 2012 reminds us of the Oriental saying, "death by a thousand cuts". Here is why.

On topic after topic, substantial progress - or collapse - seems to have ceased, to be replaced with endless articles about how some progress is being made with those positive-sounding articles being frequently followed by statements that such small progress is not actually taking place.

The American economy is an excellent starting place. On one hand, we have the Obama Administration touting every favourable report as if it is the coming of a new and glorious economic age while, at one and the same time, the Federal Reserve under Chairman Ben Bernanke is warning us that while there may be some slight improvement, there are difficult times ahead.

From our point of view, nothing much is taking place. The American economy is neither sizzling nor collapsing. Employment gains sound great, but within historic contexts, they are minimal at best. GDP is expanding, but at a minimal rate. The Fed keeps hinting that a third Quantitative Easing program 'might' take place' but no decision has been made.

The same general feeling is now widespread regarding the European debt crisis. After years of enduring a barrage of articles regarding fast-moving collapses of banking institutions, national budget debacles and borrowing on an almost cosmic scale, we are now treated to almost daily recounts of how Greece is perhaps finally moving toward a resolution (for the time being only) of its debt obligation crisis, how Spain and Italy might be headed toward serious trouble, but might not be, or how several other nations such as France, Belgium and Austria could someday require bailouts of one sort or another, but might not.

The slow-moving pace of events and the lack of resolution is well illustrated by the press over the past couple of days when we have seen headlines such as "Greece delays yet again to move on reforms", "Greek debt talks fail to reach full deal", only to be followed by "Greek political leaders agree on bailout reforms: sources", which gives the impression that FINALLY some decisive action will take place, but then we learn the report is not official, but is only attributable to 'anonymous' sources.

Another area of conflicting and indecisive news regards China. For months now, we are hearing contradictory and conflicting summary reports about whether the Chinese economy is still robust; whether it is growing, but at a slower rate; whether it is virtually standing still; or whether it has actually entered a period of contraction. Our impression is that China's economy is slowing down somewhat, but little of a truly decisive nature is taking place.

Yet another topic where one article follows another with little change in emphasis from day to day is the Iran-Israel-USA-nuclear weapons-petroleum supply controversy. While we hear almost daily how Iran could be developing nuclear weapons and how Israel could be forced to pre-emptively attack and how Iran might close the Straits of Hormuz if sanctions go too far, little is actually changing from day-to-day - not that we desire any change in the direction of war and instability.

Even news relating to the world of petroleum seems have fallen into the same quagmire of a lack of resolute action. The Obama Administration only delayed making a decision on the proposed Keystone pipeline and in Canada, those hearings regarding the pipeline from Alberta's tar sands oil fields to the Pacific port city of Kitimat are bogged down in endless testimony and which so far have neither denied permission nor allowed the project to proceed.

Two charts illustrate this growing indecision.

As can be seen, price movements in the Crude Oil contract have gone flat since late November, trading within a narrow range of $94 to $104 as stories regarding shortfalls and new supplies continue to offset one another.

U.S. Treasury 30-year bonds have fallen into the same type of indecisive action, vacillating up and down within a narrow range, also since late November. It appears that at one and the same time, we have natural economic forces arguing for higher rates (lower bonds) but the Federal Reserve is continually pressuring for lower rates (higher bonds) in order to 'hypo' the economy and help control government debt financing costs.

We suspect, in fact, that this period might be compared to the "Phony War" period of late 1939 and early 1940 when the British public watched virtually nothing of direct concern take place for those months after being relentlessly warned that an imminent invasion was to take place upon a declaration of War with |Germany and their very existence as a nation and Empire was in jeopardy.

As they were soon to find out, there was, in fact, nothing 'phony' about the war which entered a truly active phase in spring 1940 and one massive crisis after another ensued for the next five years.

In my opinion, that is our current situation. The great crises we are facing have not gone away; they have merely been mollified, postponed for a future day which might not be too distant. But they have not been resolved and at the Melman Report, we believe that when they break out into more crisis-laden forms, the effect on the monetary precious metals will be positive.

As of 6:50 AM PST (we have to catch an early ferry) financial markets have opened close to unchanged in both the USA and Canada while both gold and silver are rallying sharply with gold once again crossing above $1,750 while silver is trading near $34.25 per ounce. Base metals are higher by about one percent across the board while mining share indexes have gained by a similar amount.

In other markets, Crude oil is trading near $100 per barrel, the US Dollar is slightly weaker this morning and long term interest rates have moved slightly higher.

All quotes US$ unless otherwise indicated.

Next "Melman Minute" scheduled for Friday, February 10, 2012

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