A Melman Minute
By: Leonard Melman
One of Shakespeare’s most memorable lines comes in
King Henry IV, Second Part, when the dying King Henry addresses his son, Prince
Henry, with these words, “Thy wish was father, Harry, to that thought.” My
personal interpretation of that quote is that sometimes we wish for something so
fervently that we begin to think it true, and we might very well ignore some
important segments of reality which conflict with that desired viewpoint view.
Speaking frankly, there are many in the hard money
field who have yearned for a return to a world similar to that of the 1970s when
it seemed that virtually every golden investment spun out enormous profits in
short order. It is possible that within that yearning, there is a tendency in
the present time frame, when there is much in the news background to support
such a goal, to ignore important information which might cast some doubt on that
scenario. That is a tendency we must guard against.
One ‘red warning flag’ is beginning, in our opinion,
to take on some significance - and it may not be a welcome one for the junior
mining industry. We are referring to the damage to the long term charts of the
base metals, particularly nickel, lead and zinc, which have encountered
prolonged selling and which are now down by 50% and more from their peaks.
Just recently, we enumerated the depths of some of
the declines in the prices of the base metals. When we examine their long-term
chart patterns, the implications are truly worth noting.
The chart of zinc shows the kind of technical damage
that has taken place. After rallying swiftly from the (all prices US$) 50 cent
level to about $1.70, zinc underwent a normal one-third to two-thirds price
correction down to about $1.10 and then began to rally. However, the rally ran
out of steam, the price began to ‘back-and-fill’, and just recently, fell
through chart support and has dropped to near 90 cents. It cannot be determined
yet whether a full-scale bear market in lead is underway, but the $1.00 to $1.10
zone now appears to offer strong resistance to any upward move.
Nickel’s chart has perhaps an even more negative
look to it than zinc’s. After rallying strongly from near $8.00 per pound to
$25.00 in mid-2007, nickel went into a steep decline to near the $12.00 level by
late summer 2007. After a similar ‘backing-and-filling’ period during which it
traded between $11.00 and 15.00, nickel likewise has plunged below that trading
zone, all the way down to about $9.90. Similar to zinc, nickel has now
established strong overhead resistance which should serve to impede any
near-term advances.
Lead has followed a similar pattern to the other
two. After enjoying a huge rally which carried from under 50 cents per pound to
over $2.00 by early 2007, lead has fallen in stages to $1.50, then $1.25,
followed by a spell of narrow trading between $1.00 and $1.20, until it also has
broken support and now trades near 90 cents per pound.
Copper is the lone exception among the important
base metals as it has held relatively close to its all-time peak of just above
$4.00 and now trades near $3.60 per pound.
Clearly, traders in the base metals have shown by
their actions that something has gone wrong with the assumed scenario of
relentlessly growing demand from the Orient and South America, looming mining
shortages and future supply problems. Perhaps some of the problems they sense
include huge losses in purchasing power worldwide due to bank write-downs,
enormous security losses in financial shares which are diminishing purchasing
power, and enormous declines in home-owner equity and purchasing power.
Combined with soaring energy costs, all of these factors could serve to lessen
the consumer goods and services demand factors to a greater extent than had
originally been foreseen.
And, while there may still be confidence in the
ability of the Fed and other central banks to eventually rescue the situation by
their monetization remedies, there may be a trough of diminishing metals demand
to work through before prosperity returns to desired levels.
Whatever the case, and there will indeed be
disagreement among observers, there is no question that the serious price
declines in these base metals are worth noting and they cannot be safely
ignored, either by the investment community, or the mining industry itself.
In this morning’s trading, gold has undergone one of
its frequent and sudden selling waves, plunging from near $890 to about $874
before recovering to just above $880 per ounce. Silver and platinum are
slightly lower while the base metals are close to unchanged on average, with
nickel and lead higher while copper and zinc are lower. Financial markets
remain little changed after three hours while crude is about one dollar lower
and the U.S. Dollar relatively strong in foreign currency markets.
It is most interesting to note that the mining share
indexes, XAU and HUI, are holding firm in the face of the metals price declines.
The weakness in gold comes in the face of news out
of South Africa that mining production from that all-important nation has fallen
dramatically so far this year. A recent report from the South African Chamber
of Mines shows that gold production fell by a significant 15.6 percent in the
First Quarter 2008 from the last quarter of 2007 and was down almost 17% from
the same period last year.
The Chamber attributes the decline in production to
uncertainties regarding the supply of electric power to South Africa’s mining
industry and that nation’s power generating company, Eskom, recently warned that
their power crisis may last for years, thereby making it appear likely that
South African mining production will encounter shortfalls for some time. The
natural inclination would be to assume that this anticipated shortfall of new
production should serve to support metals prices.
But we all know what happens when too many
assumptions are made.
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