A Melman Minute
By: Leonard Melman
What a difference a day makes! Yesterday,
financial and precious metals markets opened lower and then steadily improved.
This morning, they opened mostly unchanged and then sold off, in the case of
gold, quite dramatically. After about two hours of trading, gold is down about
(all figures US$) $15 to the mid-$860s (after touching as low as $859) and
financial markets in the USA and Canada are also lower, with the Dow off over 70
and the TSX down by about 100.
Sometimes the illogic of market trends is rather startling. For instance, while
this morning’s financial markets are moving significantly lower, which could
seemingly be interpreted as an indication of economic weakness, the base metals
markets, particularly zinc and lead, are sharply higher, normally an indication
of improving economic conditions. As we have noted these past few days, such
inconsistencies have been part of the overall picture of late.
The sharp decline in gold this morning represents, in our opinion, potential new
short term weakness in gold’s chart. It had appeared that the previous drop to
near 84 on the chart (about $850 spot) could be the bottom for this correction,
but today’s selling appears to imply a test of that level, and, if it does not
hold, then a decline to stronger support close to 80 on GLD, or about $810 spot
for gold, could easily occur.
Mining share indexes also are sensing further weakness as both XAU and HUI are
down more than one percent each so far this morning.
One other note of particular interest in this morning’s trading is worthy of
comment. We discussed the long-bond interest rate index, TYX, at some length
yesterday, and observed that an upward break above present resistance in the
4.70 area could have important significance in terms of rising inflationary
expectations which will force interest rates higher to compensate for the
anticipated loss of future purchasing power. We also hold the view that, should
the TYX break through to the upside, that is, in the direction of higher rates,
it is our belief that this could have a devastating effect on the mortgage
industry.
Well, this morning the TYX took off to the upside and in just a few hours
recaptured almost half of the previous decline of the past several days.
Once again, those rates are approaching the 4.60 percent area and strong
resistance at 4.70 shows up so very clearly. In our experience, the stronger the
area of chart resistance, the more importance we can assign to the ultimate
breakthrough.
Part of our reasoning has been our belief that the real estate crisis in the USA
is far from over, that further significant price declines lay ahead, and that
these declines (combined with sharply escalating energy prices) will further
diminish the ability of American consumers to consume, thereby diminishing that
nation’s overall economy - and the only direction we have seen the Federal
Reserve take in attempting to stimulate that economy is further loosening of
monetary controls. We believe that past loosening of those controls has
historically led to rising inflationary fears and that is what we believe will
occur in the future.
With this in mind, we were particularly concerned about a commentary written by
Stephanie Pomboy of MacroMavens which was just published by Barron’s Magazine.
She noted that, in her opinion, “…the source of the present problem - home price
deflation - is not only continuing but intensifying.” She reports that the
latest Case-Shilling numbers indicate that home prices in America are now
deflating at a horrendous rate of 32% per year and she expects that to worsen
because of an ever-growing glut of unsold homes.
According to her figures, there now exists and unsold inventory of 4.6 million
homes and, to make matters worse, more than two million of them are unoccupied,
which means that they are deteriorating and therefore losing value rapidly. And,
even more significantly, these unsold inventory figures do not yet include the
growing number of homes owned by banks on which the owners have left and
returned the keys to the banks - but which the banks have not yet put up for
sale.
This week will be one of particular significance when it comes to the
publication of important economic data for America including import prices and
retail sales; consumer price index; industrial production and two regional
factory surveys; and, on Friday, Housing Starts and Building Permits which will
give us a clearer glimpse into the residential real estate future.
There is also one other new trend which concerns us and that is the sudden
willingness of the Liberal provincial government in B.C. to impose “Carbon
Taxes” and the just-announced intention of the federal Liberal Party in Canada
to follow the same path. We believe these two are just a precursor to a growing
trend, advocated strongly by the environmental community worldwide, to impose
growing levels of such taxation across the board and at ever-increasing rate in
order to discourage ownership and utilization of private motor vehicles.
Whatever else may be said, these increases in taxation will impose additional
expenditures for those who have no alternative but the use of private vehicles
to conduct their family and personal lives, along with those who are engaged in
the distribution of the world’s goods. Since those impositions do not involve
the creation of new increments of goods and services, they will force up prices
along the line - thereby further diminishing the already threatened
discretionary purchasing power of hundreds of millions of consumers.
For these reasons, we are holding to our opinion that the world’s overall
economic structure continues along a path of future instability, that corrective
action attempted will only serve to produce massive quantities of unbacked fiat
currency and that, over time, gold will increasingly assert its position as a
storehouse of monetary assets - and this should increase gold’s price
dramatically over time.
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