A Melman Minute
By: Leonard Melman
One of our goals at “The Melman Report” is to place
news relating to the economic and political background into a larger context,
rather than being overly concerned with day-to-day movements. Those are indeed
important to short-term day traders and such, but for most of us, the critically
important underlying factor is the major, long-term trend.
In fact, one of our favorite historic quotes was
written by Sir Winston Churchill in Chapter 12 of “The Gathering Storm”, the
first volume of his six-volume set on the Second World War. It was important
for Churchill to retain a clear picture of the overall scheme of things and he
wrote,
“Those who are possessed of a definite body of
doctrine and of deeply rooted convictions upon it will be in a much better
position to deal with the shifts and surprises of daily affairs than those who
are merely taking short views, and indulging their natural impulses as they are
evoked by what they read from day to day.”
With that it mind, I believe it is important to
examine two of the most important market categories which, in our opinion, will
have an important influence on future price movements in the precious metals in
particular. Those categories are the all-important USA securities markets and
the strength (or weakness) of the American Dollar. Taking a long view, history
has shown that gold does well when the U.S. securities markets are in a
prolonged period of weakness and also when the U.S. Dollar is likewise in a
prolonged period of decline.
The chart of the Dow Industrials shows us that, for
all the hype about renewed general securities bull markets, the rally from the
intermediate bottom near 11,500 set in mid-January has been a slow-moving,
laborious affair. During the preceding sharp decline from the 13,800 level, the
Dow Industrials lost about 2,200 points in just six weeks! During the recovery
period to the recent high near 13,100, it took four months to regain two-thirds
of that prior loss.
We also note that in just four trading sessions,
including today’s early 100+ point loss, the Dow has given back almost one-half
of the gain it took four months to achieve. In our interpretation, that kind of
action reflects inherent weakness, rather than strength, and we believe that a
serious leg downward in securities markets may indeed be the most probable
direction.
Much has been made of recent strength in the
“Greenback”. However, one look at the chart of the American Dollar’s most
highly regarded alternative, the Eurocurrency, also presents a picture of only
temporary positive action set inside a picture of long-term deterioration. As
can be clearly seen, the recent Dollar strength has been short-lived and has
already been reversed. It can also be noted that, during the past nine months,
there have been no less than five short-term bouts of dollar recovery - all of
which have been followed by advances in the Euro to new nigh levels.
Given the fact that the USA is still adhering to
‘easy money’ policies of rapid money creation, artificially low interest rates,
huge budgetary deficits, government handouts via mailed checks to tens of
millions and ever-expanding governmental expenditures, we see nothing to suggest
that the American dollar will suddenly embark on a sustained period of powerful
growth.
In fact, the news background suggest otherwise. In
our opinion, new record highs in the Euro relative to the Greenback will be
achieved in the short to intermediate future.
Should these prognostications prove to be correct,
we believe a move in gold above the (all prices US$) one thousand dollar level
is likely to be attained and, once that psychological barrier is decidedly
breeched, much higher prices are on the longer-term horizon.
Effects of the pronounced move in petroleum continue
to pile up as the price of that ultra-important commodity advances. Air Canada
just announced that they now anticipate a slowing of customer traffic in the
second half of 2008, perhaps accompanied by a reduction in the number of routes,
and AC also announced they are likely to impose higher charges for baggage
handling in the future. Air Canada’s news follows closely on the heels of
American Airlines’ announcement that they plan to diminish their route capacity
by 12% this year, ground 75 aircraft, and possibly lay off thousands of
employees.
“Statistic Canada” (or “StatsCan”) just issued news
that consumer prices rose in Canada by 0.8% in April, twice the predicted
amount, fed mostly by petroleum-generated cost increases across the board. The
StatsCan report also fueled doubts about the viability of predicted interest
rate cuts which have been widely assumed are on the planning board by the Bank
of Canada.
We are also receiving further news that the tourist
industry is bracing itself for a weaker-than-normal tourist season as car
drivers scale back their travel plans and retailers are noticing steady declines
in discretionary or luxury purchases as families’ discretionary income is eroded
by ever-rising energy costs.
A recent piece in Canada’s Financial Post offered
the explanation that the giant move upward in oil from $20 per barrel in 2002 to
over $130 today has all the hallmarks of previous manias such as gold in
1976-1980, NASDAQ stocks from 1995-2000 or the NIKKEI Index from 1980-1990. We
suggest otherwise.
In the case of the Nikkei Index and NASDAQ, both of
those reflected general market moves, rather than specific underlying
supply-demand conditions. The world was not going to collapse if some computer
invention failed to take hold or the Japanese real estate bubble ended. In
terms of gold, while it was and is important philosophically to hard-money
advocates, moves in the price of gold had a limited effect on the progress of
overall society at that time.
However, with petroleum, we believe the picture is
significantly different. The underlying uses for the petroleum complex products
are absolutely essential for the functioning of industrial societies, those uses
cannot easily and quickly be replaced by substitutes, demand is steadily rising,
future supply questions are becoming ever more serious - and, in a very real
sense, economic structures worldwide are under threat. Given that we believe
these conditions are not short term but rather part of the structural foundation
of our economic societies, it is our opinion that the boom in oil prices, while
obviously subject to short and even intermediate term corrections, remains
inside a long term price uptrend with much higher levels attainable in the years
to come.
As of 9:00 AM, markets are showing several
noteworthy moves. Precious metals are higher with gold up to $922, silver is
close to $18 and platinum remains unchanged near $2,160. Base metals have
recovered somewhat from recent selling and financial markets are lower, with the
Dow down by about 115 points and the TSX off by 160. Crude is trading about
$132-3 and the U.S. Dollar is lower once again, with the DX having retreated to
within ¾ of a point of its historic lows.
We invite our readers to click on to our new “Company
Reports” section. Several companies are in the process of joining and we
suggest you review our posted information, then access those companies’ websites
through the links provided.
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