A Melman Minute — October 26, 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.

One of the most spirited exchanges took place in answer to the question, “Are these the worst times in the world’s financial history?” Answers ranged from “not at all” to those who agreed that the problems being presently faced may indeed be among the worst on record. I offered the comment that what made the current situation unique was the number of nations encountering current difficulties ranging from the “PIIGS” countries including Portugal, Italy, Iceland, Greece and Spain, to Japan where the relationship between Gross Domestic Product (GDP) and government debt was at a historic high to the entire Euro community which, on balance, has slipped into renewed decline and even to such formerly prosperous countries such as Brazil and even China.

Another point made was that there was no apparent solution to the problems and then I asked the audience numbering well over 200 persons to raise their hands if they had a high level of confidence in the ability of the world’s financial and political leaders to restore stable prosperity. As has taken place at prior conventions, not one hand was raised!

I mentioned that the fact that few people had confidence in political leadership constituted one of our investment ‘pillars’ at The Melman Report since it appeared likely that as confidence in leadership diminished, more people would seek the presumed safety of precious metals ownership.

Another question related to the relatively narrow trading ranges which had constrained trading in both gold and silver for several months. Opinions varied strongly as some panelists actually believed that gold and silver would emerge from these trading ranges by breaking to the downside. I pointed to the long-term uptrend which has undergirded the entire gold move over the past twelve years and suggested that as long as that uptrend remained intact – which is the present case – the odds would favor breakouts to the upside.

One of the features I particularly enjoy about panel participation is the ‘no-holds-barred’ aspect of the questions and answers. There is no pre-arranged format or ‘approved’ replies, but instead candid opinions are offered with alacrity.

Pardon my skepticism, but it appears to me to be quite astonishing that just before the election, a slew of government reports are all appearing to indicate a strongly growing economy. We have already seen jobless claims declining and a sudden drop in the Unemployment Rate and just this morning, when it appeared the securities markets were going to open sharply lower, the Commerce Department suddenly announced that the initial GDP report for the Third Quarter 2012 showed a growth rate of 2.0%, much larger than had been anticipated.

Just prior to the release of the GDP number, the markets had been heading lower in Europe based on weak news out of Spain, on lower projected earnings for Swedish electronics giant, Ericsson and for questionable figures coming out of tech giants Apple and Amazon. The pessimism quickly dissolved and the Dow opened close to unchanged.

This favorable report was quickly followed by yet another report showing that Durable Goods Orders had advanced last month by the largest monthly increase in 2.5 years.

There was one item which caught our eye at the Melman Report and which we believe could be the harbinger of great future difficulties. We are referring to the housing markets and the manner in which new information can be projected into the inflation debate.

Builders are now complaining that due to increased construction activity, they are suddenly faced with a barrage of rising costs. Since many former workers found new jobs during the weak construction years, contractors are now faced with the fact that they must offer higher salaries to attract qualified trades people. Land costs have now starter to rise and, quite importantly, many housing component manufacturers pulled in their horns during the bad years and are reluctant to increase capacity during what might be the early stages of a fizzling rebound. The resultant shortage of some building supplies is also serving to push up prices.

Above all else, home construction relies on lumber and here we see another picture which could indicate rising home price inflation. Please note on the chart of the lumber contract that prices are now close to the highest levels in the past five years.

The effect of all these factors can be illustrated by the search for a new home in the San Diego area by a California couple. They saw a new home under construction which they liked priced at $401,000, and went ahead with an application to pre-approve their credit. By the time their credit was approved, the price had risen to $417,000.

We believe that rising prices will almost certainly accompany any swift economic rebound and, with rising prices, there is likely to be increasing pressure for rising interest rates with all the accompanying negatives such as pressure on home prices, increasing corporate costs and, given the enormous overhang of government debt, substantial increases in interest payments on that debt.

Our Spokane Convention concludes today and I will have the opportunity to address the gathering early this afternoon. In Monday’s “Melman Minute”, I plan to review some of those comments as well as take a look at the onrushing election which then will be only eight days away.

As of 7:15 AM PDT, financial markets in the USA and Canada were up slightly with the Dow ahead by about 8 points and the TSX up by 6. Precious metals moved higher with gold now just under $1,720 while silver is trading near $32.30. Base metals are trading higher with copper ahead by nearly 2 cents per pound and mining share indexes are close to unchanged.

In other markets, the US Dollar Index is trading right on 80.00, down eight basis points; Crude Oil is priced at $86.12 per barrel and long term interest rates are holding right near 2.95%.

All quotes US$ unless otherwise indicated.

Next Melman Minute scheduled for Monday, October 29

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