A Melman Minute By: Leonard Melman   NOTE: In order to complete Mr. Melman's forthcoming book on the essential fundamentals of the developing international financial crisis and its relationship to gold and silver, new "Melman Minutes" will be posted only three times per week, each Monday, Wednesday and Friday. Since the work has been expanded to include potential solutions to the growing list of seemingly insoluble dilemmas, the working title of the book has been revised to 'REVERSING THE WAY IN!"   MELMAN MINUTE - June 8, 2010 - - - - - We have just returned from the Cambridge House World Resource Investment Conference which took place in Vancouver, BC June 6-7.  Many speakers (myself included) offered their points of view on several important questions including the impact of the Eurocurrency debacle, the world's economic development and, of course, the future of the metals mining industry.  Our contributions included chairing an industrial panel, contributing to an investment discussion panel and presenting a paper entitled, "The Greatest Gamble of All".  Naturally enough, opinions among the speakers varied and, in our opinion, that is one of the greatest values in attending such conventions, namely that you receive information across a wide spectrum, rather than simply pre-approved scripted material. While the convention took place, the world at large - particularly the world of gold - continued to react to events.  Gold investors have driven gold to a new historic high, rising by a strong $25.00 per ounce yesterday and followed up that rally by propelling the yellow metals to a new historic high, reaching a new peak of $1,253 in trading early this morning!  At the same time, trading in general securities markets continued to suggest 'red warning flags' as yet another early morning rally in Canadian and American financial markets faded yesterday and indexes in both countries finished with moderate to sharp declines. The contrasting nature of gold trading versus that which reflects general securities markets is well illustrated by the following two charts.  In our opinion, the first chart, that of the Dow Jones Industrial Average, is recently reflective of bearish conditions while the second, that of gold itself, we believe is much more positive. Among the lessons we have learned from many years of study of chart analysis techniques is that there is a distinct difference between the behavior of bull and bear markets.  Within bull markets, we have observed that declines generally tend to be sudden and sharp, but are soon overcome by renewed buying that subsequently drives those markets to new highs.  It is within that concept that the investment strategy known as "buy on dips" is most successful, as was evidenced during the securities bull market of 1982-2000 or within the golden bull market which has developed since 2001.  However, inside bear markets, the opposite action tends to take place where investors can indeed create sharp rallies, but these tend to wither under renewed selling as the markets then descend to new, lower levels. With that in mind, please note the change in trend in the Dow Jones chart which shows up from late April onward.  Rallies have indeed taken place, such as on May 6 during that almost hysterical day of trading and others such as May 8 when the bottom-to-top daily rally covered 400 points and two in late May and early June where intraday rallies of over 200 points took place.  In each case, the rallies faded quickly and were soon overcome by renewed selling which drove the index to lower levels. Contrast that behavior with the chart of the gold ETF, GLD.  Since early February, there have indeed been selling waves which have been particularly sharp, such as one in mid-May which drove gold down by almost forty dollars in a single session.  However, every single selling wave has been followed by renewed buying, continuing the trend to higher prices and that trend has been reflected by the move today to a new historic high for gold. One of the oldest - and over time proven to be one of the wisest - market adages is "the trend is your friend".  We believe that the appearance of both these charts reflects a growing concern for the stocks making up the Dow Industrials and, an opposite increase in optimism regarding the future of gold. ............. We believe that the most important ingredient within any form of economic analysis, be it Keynesian or Austrian school, is a healthy dose of common sense.  Bearing that idea in mind, we ask that you consider an apparent disconnect between what we are being told and what is actually taking place. As illustrated by the recent appearance of Fed Chairman Ben Bernanke, we are being told that the recovery from the deep recession of 2008-09 is continuing.  An Associated Press article this morning noted, "...he doesn't expect the economy to fall into a second recession..." The article also noted, "...Economic data in recent months has suggested that the economy is recovery, jobs are being created, the manufacturing sector has consistently expanded and inflation remains tame." That is what we are being told by Bernanke, AP and many others in politics, the print media and on television with increasing frequency.  But we have to ask a simple question. If, for example, you were a purchasing agent employed by a major auto manufacturer or a major home-builder, and your order books were filling up rapidly and the future outlook was bright, does it not seem reasonable that you would be purchasing the very commodities - in large numbers - which were necessary to manufacture or produce the items your company marketed?  How then can we explain what is happening in the real world, as illustrated by the following two charts? If the outlook for both auto manufacturing and homebuilding was as strong as we are being led to believe, future demand for copper should be rising, and the price chart should reflect that optimism - but the opposite is the precise case as copper has fallen dramatically to just above $2.70 since reaching a relative high near $3.70 just two months ago. The drop in lumber - the main 'ingredient' in housing construction - has been even more dramatic, from almost $340 to just $213 in one fell sloop lasting seven weeks. It is difficult to look at these charts, then listen to the relentlessly bullish political and 'expert' commentary, and accord them full credulity. Financial markets this morning have been somewhat indecisive so far.  As of 9:00 AM PDT, the Dow Industrials are showing a modest 50 point advance while Canada's TSX is off by about the same amount.  Gold's early gains have faded somewhat and it is trading almost unchanged on the session while silver is modestly higher.  Base metals have been particularly strong - with zinc and lead showing the largest realtive gains - and mining share indexes are ahead by about two percent so far.  Crude oil is trading higher by about one dollar and the U.S. Dollar is off by about .35 on the DX Index. - - - - - All quotes US Dollars unless otherwise indicated. Next Melman Minute scheduled for Wednesday, June 9, 2010.  ◄  Previous Minute                                                                                                        Next Minute  ►
		DISCLAIMER The information presented above is based on data which we believe to be from reliable sources, but the accuracy of which cannot be guaranteed.  Any opinions or predictions contained herein are those of the editor and are likewise offered also for information purposes only. Any investment decisions should be made only following consultation with registered investment professionals.