A Melman Minute — October 1, 2012

It is beginning to appear that they have thrown in the towel. The "they" in this case is the forces for austerity which appeared for a while to be holding the upper hand in negotiations to restore European fiscal matters toward some semblance of long-term sanity. One of the reasons may very well be that austerity advocates in Italy, Spain and Greece may have started to fear for their very lives!

I realize that such thoughts may be considered 'radical', but they are based on news reports out of two of Europe's most troubled nations, Spain and Greece.

Spain is confronted with an almost impossible situation. Their banks are in the process of collapse unless they get an immediate infusion of outside capital; their economy is in a state of accelerating collapse; and the public has demonstrated that they are in no mood for the imposition of additional austerity measures such as those desired by the European monetary authorities who are contemplating additional 'rescue' programs both for Spanish banks and the Spanish government itself.

Matters may have come to a head this past weekend when the Spanish government admitted it needed help on both fronts - banking and its own finances - an admission which resulted in a public display of anger in the City Square in Madrid where angry crowd filled the entire square and numbered, I would estimate, in the hundreds of thousands. They were expressing the demand that there be no further budgetary cuts to services.

When I looked at photos of the immense masses gathered in Madrid to protest against their government, it became clear that the potential for great public anger now exists and I cannot believe that possibility has escaped the attention of Spanish Prime Minister Mariano Rajoy and those who share high positions within Spain's ruling elite.

And yet, the situation is coming to a real impasse. Unemployment and poverty abound and the masses want relief, almost at any price. However, Spain's government is seeing revenues collapse, deficits expand and their resources are vanishing and yet, the evident Keynesian remedies for placating the crowds of money printing and low interest rates are simply not available, since there is no home currency to control.

Greece may present problems which are even direr in nature as that country may very well be witnessing the true breakdown of its economic system. Stores are closing around Greece at an alarming rate. Tourism, upon which much of the Greek economy is built, is suffering due to social uncertainty which is turning off many potential visitors. Even the provision of what are regarded as essential government services appear to be at hazard.

The quote that caught my eye was this one, reported by an Associated Press reporter in Athens who wrote that demonstrators of the right wing Independent Greek Party gathered around the country's finance ministry and began chanting, "Ba---rds, the gallows are coming!"

Greece is caught in Spain's dilemma. The crowds are letting them know that no further cuts will be tolerated while at the same time, the "troika" of rescuing agencies including the International Monetary Fund, European Central Bank and the European Commission, are demanding the very cut in services and tax hikes which has so enraged the general public.

One obvious 'solution' is this: Since Greece cannot create its own currency as long as it uses the "Euro", then many within that troubled nation will now see the 'wisdom' of abandoning the Euro and restoring the Drachma as Greece's home unit of currency. Of course, that would likely spread panic and uncertainty among the other Eurocurrency nations.

The situation is growing explosive, and perhaps that is one underlying reason why gold rose this morning to as high as $1,794 - the highest price in months - before retreating slightly. By my interpretation, the five-year gold chart still gives the appearance of a gathering of forces aimed toward an upside breakout above the $1,800 level.

Many people decry 'over-regulation' and the bureaucratic difficulties imposed by that situation, but it can be difficult to provide sufficient documentation to describe just how intrusive, even ludicrous, documentation difficulties can become. Therefore, although the following example has nothing to do with mining, I still welcome it as an illustration of how maddening it can be to work with bureaucracies of many nations.

This example pertains to the USA which recently passed a law which requires native-born American citizens to file documentation with that country's Internal Revenue Service (IRS) to prove they owe no taxes. If they fail to do so, the IRS can actually threaten to assault their possessions.

The Toronto Globe and Mail carried a story this morning regarding an individual who was in that position; born in the USA, but a long-term citizen/resident of Toronto, Canada. He learned of the new law and attempted to satisfy its requirements. Then his difficulties began.

First, in order to file a tax return, he needed a Social Security Number (SSN), so he drove to Niagara Falls, NY to apply for that document. It turned out he needed a birth certificate to complete the application, so back to Toronto.

He then drove back to NY with all his documents, but it turned out that his birth certificate had a slightly different spelling that his registered name in Canada. He offered many reasonable verbal explanations, but was told he had to have legal documentation of his name change so it was back to Toronto once again.

A new problem arose, since he wanted to keep his lifelong name and the Canadian court said it was impossible to change his name away from the one he wanted to keep, so it was back to NY again. There, he received instructions to apply for a US Passport, as a Passport number should prove to be sufficient documentation for a SSN. He obtained the Passport and thought his troubles were over, but that was far from the course.

The Passport office had listed both his names with an asterisk noting the clarification. When he appeared to file for the SSN, that office rejected the application and demanded that a SSN be filed under the old, unused name and also ordered him to obtain school records, interviews with relatives, historic residential records, etc.

Finally, he travelled a bit further to a larger office in Buffalo, met a sympathetic officer who had the matter straightened out in a matter of minutes, putting an end to months of expense, uncertainty and worry.

This example, I believe, serves to illustrate the cruelly maddening world one can encounter with complex regulations of merciless complexity combined with, uncooperative bureaucrats and, if you ask most mining executives, they will nod in immediate sympathy.

Our point is simple. This world of over-regulation is yet another impediment to genuine prosperity based on economic efficiency which we believe adds yet another substantial reason for expecting additional economic stimulation over time - and it is economic stimulation that we believe is one of the ultimate reasons for maintaining our opinion that a major future bull market in gold and silver is now underway.

As of 9:45 AM PDT, financial markets are moving sharply higher with the Dow Industrials ahead by over 150 points while Canada's TSX Index has gained about 90. Precious metals have returned a large portion of earlier gains with gold now standing near $1,778, up by about $5, while silver is trading near $34.95. Base Metals are slightly higher on balance while mining share indexes have gained about one percent.

In other markets, the US Dollar Index is down about 14 basis points; long term interest rates are slightly higher and the price of Crude Oil has gained 14 cents to just above $92 per barrel.

All quotes US$ unless otherwise noted.

Next Melman Minute scheduled for Wednesday, October 3

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