A Melman Minute
By: Leonard Melman
While it is too early to declare that we have
truly entered a new bull phase in the price of gold, there is no question that
the last two days have certainly reversed the short-term momentum to the
upside. About mid-morning in today’s session, gold crossed back above the
$900 level (all prices U.S. $) for the first time in four weeks. Gold’s
price has also crossed above the declining short term trendline which connects
the peaks of mid-March and early April.
Another important feature of this morning’s
trading is the move in petroleum to yet another historic high figure, this time
almost touching $128 per barrel! Despite all the talk of looming demand
reductions due to onrushing economic contraction, crude oil and its complex
continue to head higher with seeming relentless force. Not only is crude moving
strongly, but the one relatively weak segment of the energy complex over the
past two years, Natural Gas, has now also started an aggressive uptrend and
presently sits near the highest price in more than two years.
As can be seen from the chart, Natural Gas has
been in a powerful uptrend throughout 2008 with only one moderate correction so
far this year.
One of the forces propelling the energy complex
higher this morning is a report out of China indicating their demand for energy
is so great that they have begun to sharply increase consumption of diesel fuel
required to power existing electric power plants. This likely is also a factor
in the ever-accelerating trend to higher diesel fuel prices here in North
America. For generations, diesel fuel was cheaper than refined gasoline, but
that is no longer the case - as any semi-trailer operator could easily discuss.
Our own interpretation is that the price
increases throughout the energy complex cannot help but be a factor in
accelerating overall price overall price inflation in coming months and years,
as the costs of transportation, fertilizers, energy, lubricants, etc. work their
way through the manufacturing, distribution and retailing networks.
Several other news events affected market
action this morning, including a dismal reading on the sentiment of American
consumers. The Reuters / University of Michigan consumer sentiment index
plunged during the first half of May to a reading of 59.5, a decline from
April’s number of 62.6 and today’s number represents the lowest reading in more
than a quarter of a century! According to a Reuters article this morning, the
low index number reflects the public’s concerns over a seemingly unanswerable
contradiction regarding future Federal Reserve policy. On the one hand, the
public sees rising inflation which is normally fought by raising interest
rates to slow down the economic activity, but they also see a slowing
economy combined with substantial job losses, a situation that historically has
called for the Fed to lower interest rates in order to
stimulate the economy.
When this confusion is combined with the obvious
and continuous deterioration in the entire realm of home ownership statistics,
the American consumer appears to us to be in a rather grumpy frame of mind - and
one which we believe is hardly conducive to a new burst of consumer spending on
discretionary items. It is also worth noting that their mood is not likely to
be improved as stories regarding the build-up of the world food crisis dominate
headlines in the print and electronic media.
Another story of note appeared to be quite
surprising, at least at first glance. We are referring to the report that
housing construction in the USA rose by 8.2% in April. However, beyond
that first glance, the picture becomes decidedly less rosy.
The growth figure was generated in its entirety
by a big jump in apartment construction, while the building of single family
homes continued to weaken. Our first interpretation is that the overall picture
has indeed worsened as it appears likely homebuilders recognize that many
present homeowners are in jeopardy of losing their homes due to sharply rising
foreclosure proceedings and those displaced present homeowners would likely turn
toward apartments as their only viable housing alternative.
In a separate report issued by the National
Association of Home Builders, it was reported that builder sentiment continued
to worsen, dragging their index for May down to 19, just one tick above the 18
recorded this past December, that number being the lowest level in the history
of the index.
One cannot help but feel a little sorry for
Bernanke and Company as the weapons of the past appear to be futile and
contradictory in combating the problems of the present.
Financial markets in Canada and the USA were
mixed at about 9:00 AM PDT with the Canadian TSX up over 100 points while in
America, the Dow Industrials were down about 70.
A last note to consider over the long weekend:
Canada’s real estate market is showing signs of the beginning of a period of
contraction as home sales are weakening in several areas. Whether the downturn
will begin to approach the severity of America’s is a question worth reviewing
next week.
Since Monday is a major holiday in Canada, our
next Melman Minute will be posed on Tuesday, May 20, 2008 - unless market
conditions in Europe and America merit a special posting on the 19th.
Happy holidays!
PS - A special “Melmania” will be
posted on the subject of environmental interference in the natural resource
development industry over the next few days. That subject is taking turns that
appear to be truly ominous for our industry.
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