A Melman Minute — October 25, 2012

NOTE: Mr. Melman is now appearing at the "Silver Summit" in Spokane, WA scheduled for October 25-26. He has appeared on an industry panel on the 25th and offering a presentation entitled "Silver - and gold - forecasts for late 2012 through mid-2013." on the 26th. Cambridge House has assembled a fine array of speakers and many mining companies with an emphasis on silver exploration.

Mining enthusiasts in the Pacific Northwest are urged to attend.

It is a sincere pleasure to be back in Spokane, Washington- my home city for more than 10 years between the mid 1980s and 1996. If the enthusiasm shown during our preliminary panel discussion held yesterday afternoon at the “Silver Summit” convention is any indication, interest in mining remains at a very high level here in Washington’s “Inland Empire.”

Frankly, I enjoy the give and take between the panel and the audience at these question-based panels and yesterday’s proved to be most interesting indeed. Most appropriately, one of the early questions gave me the opportunity to discuss my basic underlying philosophies which have led me to the conclusion that the precious metals may indeed rise sharply in the coming months and years.

The question was addressed in the following form, although the actual working is only approximate. The questioner asked, “I have been following precious metals for some time and for the past thirty years or so, there have been frequent predictions of strong to hyper-inflation for all that time, but here we still are with low official rates of inflation. Does this not undermine the credibility of the “future hyperinflation” argument?

In my reply, I offered the comments that, yes, there had been wrong predictions in the past, but the underlying fundamentals of rapid fiat monetary expansion: the need for future economic stimulation and the ‘conditioning’ of the public had all advanced over the past three decades and the rate of acceleration of all these components was advancing sharply.

One of my theories – and I wrote about this in detail about two months ago in one of these missives - was the rate of corporate earnings growth was diminishing and, in fact, might even be reversing into decline. Such action, when it occurs, could easily lead to a stock market sell-off of some important proportion, thereby leading to additional economic slowing and, ultimately, to much more stimulative activity by the Federal Reserve Board.

During the past week, in fact, several company have reported slowing to lower earnings and sales numbers and the Dow Industrials have declined sharply by about 500 points from their recent high. (see Dow chart)

While the decline is not, by itself, an indication of an imminent and powerful bear market, I believe it is a reflection of a growing skepticism regarding the durability of this economy to continue on a solid path to recovery.

However, I also pointed out that the precious metals would benefit whether the economy powerfully or whether it failed to do so. If it fails to recover and goes into early contraction, the argument becomes clear that the Fed will pull out all the stops to get the economy going and those ‘stops’ would likely include massive stimulative programs which will involve a renewed huge creation of fiat currency.

Perhaps even more dangerously, if the economy goes into strong expansion, the demand for money is going to increase and one of the most fundamental economic concepts is that when demand increases faster than supply, costs (interest rates in this case) rise – and a rise in interest rates could bring on the calamity of declining real estate values which might lead to a renewed and even more powerful economic debacle than the one which occurred in 2007-08. The decline in home values, leading to millions of new ‘underwater’ mortgages, would likely occur because home buyers base their purchase decisions to a high extent on affordable monthly payments, and if interest rates rise, the principal value of a loan must decline if the net monthly payment is to remain approximately constant.

This gathering should be quite a shindig as Spokane has been intensely involved in mining for many decades and I am looking forward to two days of rousing discussion and the distribution of a great deal of valuable information.

Sometimes, the inconsistencies that take place within the realm of economic discussion can become almost overwhelming. During my review of this morning’s Wall Street Journal I came across another such bit of double-think.

According to that publication, a group of 80 important Chief Executive Officers called upon the political leadership to raise taxes and reduce government spending in order to stimulate more economic activity and to provide a sounder basis for future economic development.

Unless you have been trapped on some mountainside for months, you would likely recognize that those two conditions, which are already baked into present legislation, are what economic experts are naming the “FISCAL CLIFF”, believing that the combination of higher taxes and sharp reductions in government spending will undermine the economy following December 31, 2012.

And now, we have a leading group of powerful industrial titans calling for precisely the same procedure in order to provide for economic strength.

No wonder the public becomes confused and begins to distrust virtually all such ‘authorities’.

Who would have thought that what at first appeared to be little more than a foreign demonstration and its aftermath could become perhaps the most important event leading up the American Presidential Election less than two weeks away, but the Benghazi attack and the Obama Team’s response – including the President himself - might become THE pivotal event of the campaign. For the past two weeks, documents and testimony which have been released have shredded to bits the Administration’s well-publicized contention that the attack was merely a protest against a film ridiculing the prophet Mohammed.

Instead, videos, e-mails, and testimony regarding information provided by the State Department’s security arms have clearly indicated that it was a well-prepared attack by terrorist agencies and, in fact, an early e-mail identified the terrorist group which claimed responsibility for the attack which resulted in the death of the US Ambassador plus three other men. The great question now under discussion is why the Administration continued to put forward the ‘hated film’ thesis for many days after they apparently had solid information pointing in the direction of an organized attack.

The President’s own credibility and trustworthiness have been questioned and words such as ‘liar’ and ‘cover-up’ have been bandied about.

Somehow, I can hardly wait for November 6 to have the election finally resolved.

As of 7:45 AM PDT, financial markets in America and Canada were mixed with the Dow Industrials ahead by over 70 points while Canada’s TSX Index is down by about 30, likely brought down by a generally lower C$ and declining crude prices over the past week. Precious metals are stronger with gold up by $14 to near $1,716 while silver has gained 56 cents to $32.18. Base metals are unchanged on balance while mining share indexes have advanced by more than 2% this morning.

In other markets, Crude Oil has fallen well below the $90 mark and now trades near $86 per barrel while long term interest rates are once again above 3% and the US Dollar Index is virtually unchanged near 80.00.

All quotes US$ unless otherwise indicated.

Next Melman Minute scheduled for tomorrow, October 26 when I plan to review events at the well-named “Silver Summit”.

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