A Melman Minute
By: Leonard Melman
After four days of rather sharp selling, precious
metals markets have stabilized somewhat with gold rising back to near $890 (all
figures US$), silver once again approaching $17.00 and platinum just above the
$2,000 per ounce level. However, the real - and somewhat under-reported story -
is in the base metals. Quietly, almost hidden from view, they have undergone
some severe price erosion. The following table illustrates their decline from
the highest levels attained during the past six months to their present - and
much lower - prices.
|
METAL |
High in past 6 months |
Present Price |
|
LEAD |
$1.50/lb |
$0.90 |
|
NICKEL |
15.00/lb |
10.00 |
|
ZINC |
1.28/lb |
0.89 |
|
COPPER |
4.00/lb |
3.60 |
|
|
As can be seen, these are no ordinary,
‘garden-variety’ declines, but reflect important potential revenue losses with
lead off by 40% from its 6-month high, nickel and zinc down by about 30% and
copper, the relative best performer, down by ‘only’ ten percent.
These figures would normally lead an observer to
conclude that business conditions were in decline and demand was being
substantially reduced. However, that conclusion would lead to another apparent
contradiction because price inflation figures are rising sharply in many
countries around the world, and that increase in inflation has led to a major
turn in long-term interest rates toward an upward direction.
The breakout to the upside in long-term rates is
unmistakable on the charts and our oft-watched TYX Index has now moved above
strong resistance to the 4.80 level for the first time in many months. Mortgage
rates, reflecting this renewed upward pressure, have just reached their highest
level in eleven weeks, a most unwelcome development for the struggling
residential real estate industry.
So, at one and the same time, we have base metal
prices falling, which would normally be reflective of worsening business
conditions, and rising interest rates, commonly associated with strong business
conditions which, presumably, should reflect upward demand on the provision of
goods, services and monetary demands. This is yet another quandary for the
financial markets to sort out - as if they didn’t have enough problems to deal
with already.
Inflationary expectations are clearly on the rise.
An article in the Financial Times just reported that inflation in the Eurozone
had reached record levels during the Zone’s decade-long existence. Their
inflation figures were primarily pushed higher by rising fuel and energy costs.
In Germany, for example, heating oil prices rose an astonishing 13 percent
during the month of May alone, while diesel prices were up 9 percent in the same
month. One of the effects of these rising prices is to put aside, temporarily
at least, any talk that European banking authorities might attempt to lower
interest rates at any time in the near future.
In other inflation news, Dow Chemical just announced
that the price lists for their petroleum and commodity-based products would jump
by twenty percent! The company chief executive, Andrew Liveris, told the
Financial Times’ New York correspondent that the company’s action was taken
because of, “…the failure of the U.S. government to deal with higher energy
prices for causing a true energy crisis.” Price increases will be particularly
large for those items which are made from natural gas and oil derivatives such
as plastics, polyethylene, polypropylene and polystyrene. These compounds have
many uses including carpeting, packaging, toys, clothing, and signage materials.
Several other large chemical companies including
DuPont and Eastman Chemicals have also raised their product prices
substantially, indicating that this is no one-shot, narrowly-focused matter, but
one which will generate additional inflationary prices throughout the industrial
structure.
There is yet another offshoot to the entire spectrum
of rising inflationary expectations, and one which, in our opinion, could lead
to the gravest of consequences. As many countries, states or provinces, and
municipalities are struggling with diminishing tax revenues brought about by
falling real estate assessments and slowing business conditions, ominous
rumblings of a true tax revolt are starting to be heard as cash-strapped
consumers grow tired of ever-increasing government fees, penalties and new tax
impositions.
Some of these appear to be relatively minor such as
fears on Vancouver Island that a doubling of the per vehicle garbage fees for
a large landfill could be ill received by the general public. Several
municipal officials immediately predicted that there would be a revolt against
the sharp increases which would take the form of illegal dumping in off-road
areas - which would ultimately cost the municipalities more to correct than any
amount the increased fees would raise.
A much more serious form of tax protest its taking
shape in the U.K. when roads into London were blocked by convoys of hauling
trucks as drivers and owners protested against huge increases in Britain’s
already-onerous fuel taxes. While Canadians and Americans are shocked by the
latest round of gasoline prices to about C$5.00 and US$4.00 per U.S. gallon
respectively, the price in Britain for the same quantity of fuel is about ten
Canadian or U.S. dollars! A Times of London article informs us that fully
two-thirds of the price of both gasoline and diesel fuels is the result of
government taxation. What is particularly galling to many Britons is the fact
that fuel duties are piled onto the cost of fuel and then the nation’s Value
Added Tax is added to the entire cost, truly reflecting a tax on a tax.
To add to haulers’ anger, the government is
determined to increase yet another fee, this one known as the “Vehicle Excise
Duty”, required in order to keep your vehicle on the country’s roads.
European nations are truly caught between a rock and
a hard place of their own making. While Eurozone commitments require them to
keep annual budgetary deficits to a low level, their own expenditures are rising
rapidly and, unless they are able to raise taxes quickly and significantly, they
will fall into default against those budgetary agreements. If several countries
begin to default en masse, then the entire structure of the European Economic
Union could be threatened.
What a world!
All of this uncertainty, and it is growing, leads us
to believe that the precious metals will finally be recognized by the general
public at large as a true storehouse of personal monetary value. Should that
occur, the resultant bull market for gold and silver could be of historic
proportions.
Financial markets in North America are spit with the
TSX rising sharply in Toronto while the Dow Industrials are relatively unchanged
in America. Crude oil is trading quietly near $126 per barrel and the C$ has
fallen moderately against the Greenback, returning to just above par.
◄ Previous Minute
Next Minute
►
