A Melman Minute
By: Leonard Melman
It has certainly been more pleasurable to look at
the morning metals’ prices the past few days than has been the case earlier, and
this morning is no exception with gold once again above $880 per ounce (all
figures US$), silver up about thirty cents to near $$17.00 and platinum above
$1,950, seemingly headed to above $2,000 once again. Base metals markets are
also higher, with zinc behaving particularly well.
However, the “really big” news is coming from the petroleum markets where the
price of crude is now near $122 per barrel! Despite all the warnings from the
petroleum bears of an imminent bust in the price of petroleum, each selling wave
is quickly overcome and prices for that widely-used commodity simply move on to
new record high territory.
The sheer, relentless power of the petroleum move is illustrated by the
long-term chart on Crude which places these counter-sell offs in the proper
perspective, namely as interruptions within an ongoing and powerful bull market,
the implications of which are enormous. If one were to draw a curved line
connecting the lows of 1998, 2001 and 2007, it would be clearly seen that the
curvature of the line was steadily accelerating - and that all the action of the
petroleum markets was taking place ABOVE that line. In our interpretation, that
does not speak of a market which is peaking and ready to retreat substantially.
Instead, it appears to us that the petroleum market is gathering strength over
time.
It is also worth noting that this petroleum bull market is no
“flash-in-the-pan”, having lasted for almost ten years and having advanced from
just under $12.50 per barrel to almost $125 per barrel - a magnitude of ten
times the originating price.
As crude rises, so does the price of gasoline, which is now just under $4.00 per
gallon in many parts of America and well over five dollars per U.S. gallon
across Canada. For millions of motorists, driving is much more a necessity than
a luxury, as huge numbers of people either live in distant suburban areas or
rural, remote areas, neither adequately serviced by public transportation,
leaving their automobile or pickup as the only effective means of commuting to
work and taking care of essential family needs. With their expenditures for
gasoline rising rapidly, simple mathematics can demonstrates that as those costs
rise, the money available for every other expenditure diminishes, thereby
putting additional pressure on important consumer discretionary purchases.
There is yet another fact to consider. If all that money was spent in the
domestic economy, particularly in the United States, it could be economically
demonstrated that the net effect on the economy might be neutral as the
recipients of the petroleum funds would simply disburse them back into the
nation’s economy. However, since America imports about fourteen million barrels
of oil per day - now at a cost of about $1.7 billion per day or over $600
billion per year - those are funds moving out of the country into foreigners’
hands. While those foreigners may indeed use those monies to buy U.S. government
debt or to purchase interests in major American corporations, it can readily be
seen that America is steadily ceding increments of control over their own
domestic affairs, both social and economic, into foreign hands. In our view,
that cannot help but weaken the internal strength of that nation over time. In
turn, that growing weakness, should it develop as we anticipate, would likely
lead to distortion in the international economic and security systems, and those
uncertainties, over time, could become factors in future golden bull markets.
In the meantime, mining shares are beginning to perform better over the past few
days, but it is important to view these improvements in context. While the XAU
has indeed recently advanced by ten percent, from about 163 to 179, when viewed
on the one year chart, that advance does not appear to reverse any important
trends, but merely serves to bring the index back into the bottom part of the
trading range which has held for most of 2008.
One of the most interesting areas of mining investments during the past few
years has been the field of uranium exploration and development. As the
fundamental case for uranium became public knowledge, a veritable frenzy took
place among mining companies to become involved in the acquisition and
development of uranium holdings. As recently as early 2004, very few such
companies, other than a very few well-known producers, were involved in any way
in uranium development.
However, once the investment public became aware of the case for uranium, the
situation changed dramatically as literally hundreds of junior mining concerns
added uranium holdings to their overall property portfolios and new entities
specifically focusing on uranium development came into being. In the meantime,
the price of uranium shot skyward, rising from under $10.00 per pound to over
$130 at its peak, feeding the frenzy. The share price of many of these
companies, both producers and newer exploration/development entities, literally
shot skyward.
The case for uranium, simply put, noted that new uranium production was
insufficient to match current usage at the world’s present nuclear producing
plants and the number of new plants on the drawing boards of nations such as
China and Japan would surely exacerbate that shortfall. In addition, the
recovery of fuel-grade uranium from weapons left over from the “Cold War” era
was becoming increasingly unreliable. One other important factor in the uranium
equation was the production of power generated by nuclear plants was
pollution-free, since it did not involved the burning of fossil fuels such as
coal or oil.
About eighteen months ago, the situation began to change dramatically and
uranium mining share quotes, on average, began a severe and protracted decline.
It soon became apparent that it would be many years before any of these new
developments actually achieved production. Then the price of uranium itself
began to fall, now sitting just under $70.00 per pound. And, recently,
environmental opposition to uranium development began to harden following a
period when it appeared that the pollution-free aspect of nuclear power
production might actually make them advocates of such developments.
And now, in the past few days, the Province of British Columbia has just placed
a moratorium on any nuclear exploration and development, reversing an apparent
policy by the B.C. government of only one year earlier which indicated uranium
development would be possible.
One interpretation is that the provincial Liberal Party, now in power, is
courting “Green” movement support for the upcoming provincial election. Another
interpretation is that, in courting such support, the province of British
Columbia will turn back toward the days when the Ministry of Mines functioned as
the “Ministry of No-Mines.”
Once again, this episode demonstrates the vulnerability of mining to government
actions, whether foreign or domestic.
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