A Melman Minute — October 9, 2012

One of the most unusual repetitive patterns we have seen over the past couple of years is a period of heightened activity followed by a period of almost perfect calm. We offer several charts related to important investment categories to support the hypothesis that we are now in a similar period.

After a period of sharp decline, the US Dollar Index quite suddenly stopped falling and has drifted sideways within a very narrow trading range for the past month. This has taken place despite the presence of numerous international developments which, in our opinion, would 'normally' have resulted in significant market action.

Our next chart is that of gold. Following a period of substantial rally, the price of gold, like the US Dollar Index, has been suddenly confined to a remarkably narrow trading range just under the $1,800 level. This narrow trading has taken place despite upheavals in the Middle East, continued economic trauma in many nations and an almost unparalleled expansion of coordinated intervention by the world's central banks.

Even an apparently unrelated commodity such as wheat is showing the same type of pattern where previous powerful trends are suddenly suspended, to be followed by a period where trading is confined within almost incredibly narrow trading limits.

One of the lessons I have learned from examining trading charts for almost 40 years is this: the ongoing trend is the most powerful force in the evaluation of chart patterns and, in each of these cases, charting textbook authors such as 'McGee and Edwards' and 'William Jiler' suggest the normal more probable course is for a sideways pattern to break in the direction of the preceding powerful move. In the three examples noted above, that would indicate the US Dollar Index would be entering a period of renewed decline and both gold and wheat will be moving higher.

It is worth noting that should those moves occur, each of those new breakouts would favor higher prices for the precious metals commodities.

Obviously, no guarantees can be offered, but it is interesting to look at these sudden periods of quietude through the filter of technical analysis.

While most eyes of the world are focused squarely on the upcoming American elections, another important contest has just been concluded in Venezuela, with the result being renewed triumph for Hugo Chavez, the avowed socialist leader of that nation. The margin of victory was a larger-than-expected 55% to 44% over his nearest challenger and, in the process, Chavez' party won majorities in 22 of Venezuela's 24 states. His control, then, is virtually absolute for the next six years

On a personal level, I am frankly amazed that Chavez won such a resounding triumph, given the fact that Venezuela's economy appears to be in a state of collapse as inflation is raging, their home currency is falling, the infrastructure is crumbling, oil production is falling, there are shortages of basic food items such as milk and the murder rate in Venezuela is now six times as high as the supposed murder capital of Latin America, Mexico.

Despite all this, the voters appears to be drawn to the socialist flame with the implied promise that somehow, Chavez will find more high-income people to loot, more companies to nationalize and more oil to recover - thereby providing the populace with renewed spoils of 'something for nothing'.

At The Melman Report, we believe that Venezuela has chosen a path fraught with peril, one which will make it virtually certain that few if any sources of foreign capital will find their way into Venezuela and where government may ultimately resort to that oldest of 'remedies', a truly open printing press which will potentially bring about the scourge of hyperinflation.

Obviously, we would suggest that anyone contemplating a new mining investment in that country should stand back and re-check the potential hazards of an investment of that nature - despite Venezuela's obviously inviting geologic discovery prospects.

During the past several decades, if there is one caution which might be offered to investment advice readers it would be to check the self-interest of the authors. For examples, an economist hired by a mutual fund would find it difficult to write that in his opinion, the securities markets were about to collapse. An economist for a major bank which makes its greatest profit by attracting borrowers set to expand their industries would find it difficult to write that the economy was about to go 'to hell in a hand-basket'.

What I look for is objective analysis, meaning the only item being sold is the author's analytical abilities and, with that in mind, I would like to mention a report written by economic writer Glenys Sim and published on the Bloomberg News service.

Sim cites Simon Hunt Strategic Services - an analytical information service - which is cautioning their clients that, "…Copper consumption in China will contract this year for the first time since 2008 as demand falters and inventories climb…", according to the firm's CEO, Simon Hunt. According to Sim, the firm Simon Hunt compiles research and analysis on the global market.

Hunt is particularly gloomy in his assessment of China's economy going forward and noted, "…The safety valve of exports has gone, the domestic economy is slowing down, they have a problem of surplus capacity and cash is extremely tight." He also noted that if copper performs poorly, that performance could easily spill over into other base metal commodities as well.

Many base metals professional analysts regard copper as the most important of all the base metals since it is fabricated into so many different products. In fact, its importance to the overall economic scheme is so important that it has become known as "Dr. Copper." If Simon Hunt is correct in his facts and prognosis, the Dr. himself may be in need of medical care himself.

We interpret this as yet another indication that worldwide economies will be needing substantial stimulation in coming months and years and the most likely form of such stimulation, in or opinion, will be monetary creation by central banks. Ergo, we remain bullish on the long-term prospects for the precious metals, particularly including gold and silver.

As of 9:45 AM PDT, financial markets appear to be sensing some new troubles in Europe as the Dow Industrials are down by more than 90 points while Canada's TSX Index is off by more than 110. Precious metals have fallen back moderately with gold down about $7 to near $1,770 while silver has just slipped below $34.00. Base metals are down about one percent on balance while mining share indexes have fallen by a similar amount.

In other markets, the US Dollar Index is up by about 40 basis points and is now approaching the '80' level, Crude oil has gained almost $3.00 per barrel this morning to about $92 and long term interest rates have moved a bit higher.

All quotes US$ unless otherwise noted.

Next Melman Minute scheduled for tomorrow, October 10. There will be no column on Friday as I will be traveling by auto to Southern California for a family visit but "Melman Minutes" should resume on schedule the following Monday AM

NOTE: Mr. Melman will be appearing at the upcoming "Silver Summit" in Spokane, WA scheduled for October 25-26. He will be appearing in an industry panel on the 25th and offering a presentation entitled "Silver - and gold - forecasts for late 2012 through mid-2013." Cambridge House has assembled a fine array of speakers and many mining companies - with an emphasis on silver exploration and development - will be maintaining exhibition booths at the conference. Mining enthusiasts in the Pacific Northwest are urged to attend.

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