A Melman Minute — February 1, 2013

Let’s have a little fun with numbers. The 2000 US Census showed a total American population of 281,424,000 and the 2010 Census showed 308,745,000 - a gain of 27,321,000 in ten years, or an annual rate of approximately 2,730,000 per year. This reduces to around a 227,000 population increase per month, assuming America’s population is continuing to grow at roughly the 2000-10 rate.

With that in mind, we can better evaluate this morning’s U.S. Department of Labour jobs report which shows a net gain of 157,000 jobs for January, 2013. As can be observed, the gain in jobs is barely sufficient to maintain a static employment picture and, in fact, the published Unemployment Rate for January went up from 7.8% to 7.9%.

Our point is simple. Despite the influx of more than five trillion dollars of economic stimulus in the form of budgetary deficits over the past four years, combined with huge Federal Reserve Board stimulative actions, the American economy is performing in a manner which can be described as static at best and perhaps slightly in decline at worst. This suggests to us that for several years at least there will be no radical spending reductions; no elimination of the massive US budgetary deficits; no elimination of the Federal Reserve’s fiscally liberal stance and, therefore, a continuation of many of the factors which have historically contributed to past rousing precious metals bull markets.

SME INTERESTING CHARTS

Monday morning, we noted how actions within the gold market were beginning to resemble a roller coaster ride. That ride has now become quite amazing during the past three days. Please note the following chart which details gold trading Wednesday, Thursday and so far this morning.

About mid-morning on Wednesday, the gold market suddenly surged higher, rising by twenty dollars from $1,664 to $1,684 and then stabilized. Quite suddenly, at about the same time Thursday morning, gold plunged by twenty dollars, falling from $1,678 to $1,658. Now, this morning, beginning at almost the same hour of the trading day as Wednesday and Thursday's moves, gold soared by twenty dollars from $1,662 to $1,682 and, not only that, but it then proceed to fall back almost exactly twenty dollars before regaining about one-half that amount.

When I see such moves, one suspicion enters my mind and that is reflected in the word `manipulation`, defined in my six-inch-thick Webster's Dictionary as, `...to manage or control artfully or by shrewd use of influence, especially in an unfair or fraudulent way...`

Obviously, if such manipulation is in fact taking place, it is bound to be shrouded in secrecy and obfuscation and, therefore, I cannot offer concrete proof to back up my suspicions - but this type of action is sufficient in itself to at least point to the possibility of behind-the-scenes direction of the gold market.

This particular pattern, which is normally used to identify important market reversals, forms when a security, Index or commodity has rallied significantly over time, but then turns down, forming the “left shoulder” (LS) of the formation. If that downturn is reversed back to the upside and the chart makes a new high before turning down a second time, that is how a “head” (H) is formed. If that downturn ends and a new rally begins, it is important to note whether that new rally ends below the top of the “head” or breaks through to a new high. If it ends lower and then breaks down once again, that reflects the formation of a “right shoulder”. (RS)

(By the way, a “Head-And-Shoulders-Bottom” formation is formed in precisely the opposite manner.)

The most important feature of this type formation is whether the price remains above the “neckline”, formed by connecting the lows formed by the three declines.

With all that in mind, please observe the Dollar Index (DXY) chart for the past three years.

Please note the rally which took place from mid-2011 to early 2012 which saw the index rise to near 82, followed by a decline to 78, giving us the LS. The index then rallied to a relative high of 84 in summer 2012, followed by a decline again toward the 78 level, giving us the H. This was followed by a subsequent rally to about 82, stopping short of the summer rally before a decline followed, this one continuing at this time, indicating a clear RS.

Therefore, we have all the ingredients of what could turn out to be an important reversal to the downside, particularly including a clearly-identified “neckline” near the 78 level. If the DXY chart falls below the 78 level in the near future, then the formation will be completed and we may have the onset of an important weakening of the Greenback.

Charting is an inexact science, to be sure, but it can serve as a useful tool in our analysis arsenal and at the present time, it is giving us fair warning to be on the alert for possibly significant moves. Of course, if the US Dollar weakens substantially, historically that could be bullish for the precious metals markets.

AMERICAN CITIES IN TROUBLE

How would you like to be sitting in your home when, quite suddenly, the ground gave way, swallowing up your apartment and that of a dozen others and breaking pipes and gas mains all around you? Fortunately, only property was destroyed when an eight-foot deep sinkhole opened up beneath many residents of Harrisburg, Pennsylvania New Year’s Eve.

The important part of this story is that when the city was contacted to repair the sinkhole and re-examine forty other known ones in the city, people were told that no funds were available for repairs and, as reported by Michael Corkery in this morning’s Wall Street Journal, “...The Pennsylvania capital can’t afford to replace many of the aging pipes, some of which date back to the nineteenth century...”

Harrisburg is already facing default on its existing debt and therefore has been shut out of the giant Municipal Bond market, leaving them unable to obtain short-term funding. A state court has already appointed a receiver to oversee Harrisburg’s finances.

Now another new city has been added to the list of financially devastated municipalities and this one is no ‘small potatoes’. We are referring to Detroit, a city whose population has dropped from near 960,000 just a decade ago to barely 700,000 today. This exodus has left empty and decaying neighborhoods; blasted budgets; huge residential asset accounts wiped out; and has dramatically reduced the city’s ability to raise taxes - but Detroit is still burdened with historic union salary and benefit agreements.

We believe that these two cities, along with others already announced in California, are just the ‘tip of the iceberg’, with many more horror stories to follow. The stress on the Muni Bond Market could become intolerable, adding to the already-existing hues and cries for the federal government to come to the rescue.

As of 9:45 AM PST, financial markets in the USA and Canada are rising sharply with the TSX Index ahead by over 80 points while the Dow Industrials are ahead by more than 130. Precious metals are holding on to good gains with gold up by ten dollars to $1,671 while silver has gained 45 cents to $31.92. Base metals have posted good gains as well on balance while mining share indexes are ahead by slightly more than one percent.

In other markets, the US Dollar Index has lost 21 basis points to 79.04 while both Crude Oil and long term interests rates are close to unchanged on the session.

All quotes US$ unless otherwise noted.

Next “Melman Minute” scheduled for Monday, February 4

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