A Melman Minute
By: Leonard Melman
Market action this morning has been rather subdued
thanks to the fact that exchanges in both America and the U.K. are closed for
national holidays. However, overnight trading took place in Asia and Europe and
Canadian markets are active as well. In early trading, gold is about unchanged
in the mid $920s (all prices US$), other precious metals are trading quietly,
base metals are likewise close to unchanged on balance and crude oil is holding
near $133.00. In Toronto, the TSX Index is very slightly ahead after two hours
of trading.
With most markets on sort of ‘cruise-control’ for
the day, this is an opportune time to take a long look at perhaps the single
most important macroeconomic factor which could have a dramatic effect on our
world of precious and base metals prices. We are referring to price inflation,
and, more particularly, the anticipation of the future rate of price
inflation. It is the expectation regarding the direction of future
inflation that plays such a dramatic role in price influences.
If the newspapers are to be believed, there are two
primary ingredients to discussions of price inflation at this time and those are
food and petroleum pricing. Indeed, market prices of both those categories have
been rising sharply and are contributing to pronounced increases in public
inflationary indexes. However, we believe there is a more fundamental factor at
work, one hidden somewhat from public view by the furor over food and petroleum
expenditures. That important factor is monetary growth, particularly in
America.
The widest measure of money supply, M-3, has
historically been the most utilized of the three categories, M-1, M-2 and M-3.
Unfortunately, for no apparent reason other than a suspected reluctance to
continue publishing figures which reflected runaway monetary growth, the U.S.
Treasury ceased publication of that number in spring, 2006. However, private
economists have continued to calculate a proxy number and now estimate M-3
growth at near 20% per annum. It is that growth, in our opinion, which provides
the ‘fuel’ for price increases in petroleum and food, plus a host of other
products.
In the past, whenever money growth began to reach
out-of-control levels, the most accepted remedy was to clamp down on money
supply, drive interest rates higher and thereby slow the economy and shrink
demand for money. However, the great question in this era is whether the
Federal Reserve Board can afford to adopt such policies.
We believe they cannot. America must import huge
quantities of petroleum in order to function. The entire retail apparatus has
been so reconstituted during the past two decades that it must import huge
quantities of goods manufactured overseas - and the combination of these two
factors has resulted in a Balance of Trade deficit approaching eight hundred
billion dollars per year. In addition, the American federal government, now
fighting two major wars plus moving forward with attempts to stimulate the
economy by handing out millions of checks created out of monetary thin air, is
now running an annualized deficit forecast to approach four hundred billion
dollars over the next fiscal year. The combination of the two represents
monetary demand of about 1.2 trillion dollars in new currency values.
To us, that does not appear to be the background
from which sound monetary policies will spring. We also cannot help but note
that the woes afflicting America’s industrial empire appear to spreading and,
most recently, we have been hearing about declines in the airline industry which
have been forcing many airlines, both small and large, into bankruptcy courts.
Even those which have been able to avoid such action so far have had their stock
values decimated of late and we offer the chart of giant American Airlines as an
example.
As can be seen from the chart, the stock has fallen
from almost $30.00 to $6.00, a loss of nearly eighty percent of shareholder
value! The price charts of many other airlines have similar appearances. The
destruction of values in such an important industry cannot help but compound the
difficulties facing the economy at large.
And so, our conclusion is that the Fed will continue
loose money policies because it appears to us that it has little choice. The
American economy must be stimulated in order to avoid outright collapse into
deep recession or depression. The financing of immense budgetary deficits must
continue to avoid default on America’s mammoth governmental debt, now nearing
ten trillion dollars. And, America must continue to import huge numbers of
manufactured goods from foreign nations - most prominently, China - because
their own once-mighty manufacturing industries have been in severe decline for
several decades.
We believe, therefore, that future price inflation,
perhaps even future hyper-inflation - is being built into the system, and,
historically, such conditions have provided the fuel for spectacular bull
markets in the precious metals.
It will be our pleasure to travel today to the
southeastern BC town of Greenwood to visit in order to visit Merit Mining’s
newly-producing project. Information on the company can be obtained from our “Company
Report” section or by visiting the company’s website.
Thanks to the wonders of modern communication
technology, we plan to prepare tomorrow’s Melman Minute on schedule. It will be
most interesting to see how British and American markets react to the news which
has accumulated over their long weekends.
◄ Previous Minute
Next Minute
►
