A Melman Minute
By: Leonard Melman
Several weeks ago, we included a chart of the
Canadian Dollar and noted that we believed the C-Dollar could prove to be a
proxy for the resource development world. During the past few trading days, it
has shown every indication of strength, obviously to some extent reflecting the
immensely powerful move in crude oil. But we are also of the opinion that the
widely-anticipated slowdown in America may not be as severe as some have feared,
and may also not spill over into other worldwide economies to a significant
extent.
As can be seen, the C-Dollar has been gathering momentum since late March and
appears ready to challenge chart resistance levels, first near US$1.03 and later
the all-time high set last November at about US$1.10. The Canadian currency is
strong this morning and by 9:00 AM PDT was approaching the US$1.02 level.
Clearly, capital is moving into Canadian investments and we believe this is
indicative of a growing conviction that the resource rallies, upon which the
Canadian economy is based to a large extent, will not fade away any time in the
close future.
A study authored by Jacqueline Thorpe and published in Canada’s Financial Post
would appear to confirm this concept. She points out that estimated growth
figures for the coming year from several important economic areas around the
world do not appear at all dismal - despite the accepted assumption that growth
in the USA will be close to nil, or even negative.
Among the recently published growth reports for the just-completed quarter,
Thorpe notes the following annualized rate of economic expansion:
Germany - 6.3%
Japan - 3.3%
France - 2.6%
Eurozone as a whole - 2.8%
U.K. - 1.8%
China - 10.6%
Regarding the world’s economies as a group, she
notes that, “…this hardly looks like a global economy being sucked into the
vortex of a U.S. recession.”
Among the companies cited is American investment banking giant Goldman Sachs,
with that highly-regarded firm now suggesting that the American economy may not
sink as rapidly or as far as had been previously forecast, and, “…Goldman now
sees emerging market growth of 7.4% in 2008, up from a mid-January estimate of
7.4%.”
Along with the Canadian dollar’s strong relative performance, we also cannot
help but note the even stronger performance of the Canadian securities markets
as the leading average, the TSX, just broke through the 15,000 barrier for the
first time in history. Petroleum and other natural resource shares have been
leading the way, which would appear to be a confirmation that the investment
community believes demand for natural resources is not likely to simply dry up
anytime soon.
Coincident with the Financial Post article, the Financial Times of London also
published an article dealing with the somewhat unexpectedly robust status of the
large German economy. The FT story tells us, “…Defying global economic storms,
German gross domestic product (GDP) leapt by 1.5% in the first quarter
(annualized rate of 6%+-LM), the fastest quarterly rate in nearly 12 years…the
latest data will strengthen policymakers’ faith in the Eurozone’s underlying
robustness…”
However, they also were unkind enough to add a footnote that “…The financial
crisis could worsen and spill into the economy this year, Germany’s top banking
regulator has warned.”
It was a forecast of just such an expectation, that the credit crisis was far
from resolved and more trauma lay ahead, that caused the American securities
markets to undergo a bout of heavy selling yesterday which drove the Dow down by
almost exactly 200 points and which has carried over into today’s markets, with
the Dow off another 70 after about two hours of trading.
As can be seen, the Dow is now at the lower end of the trading range which has
contained it for several weeks. A break below that range, particularly a fall
under the 12,500 level, would appear to confirm the idea of future troubles for
the American economy.
Our own overall investment opinion is unchanged regarding the precious metals.
We continue to believe that gold, silver and perhaps also platinum will do well
over time regardless of whether the overall world economies collapse, which we
believe would lead to money creation on a massive scale in order to stimulate
growth, or whether they strengthen, in which case the massive monetary creation
which has already taken place, combined with high demand for goods and services,
would likely lead to rising inflationary expectations - which have historically
been a plus for the precious metals.
This morning’s trading has seen a continuation of the great petroleum rally,
with the price of crude having just exceeded (all prices US$) $131 per barrel.
In response, the precious metals are also strong with gold now approaching the
$930 level, silver up 16 cents at $17.82, platinum sharply higher to just under
$2,200 per ounce and palladium once again above the $450 level.
However, most base metals continue to show weakness, reflecting sudden and
perhaps unexpected increases in the level of London warehouse inventories over
the past few weeks.
The C$ now stands at US$101.62 and the U.S. Dollar is showing renewed weakness
with the DX Dollar Index once again down to the 72 level. We believe that should
this Index break to a new record low below the 71 level, that would be regarded
as a strong plus for gold in particular.
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