A Melman Minute
By: Leonard Melman
During the past few weeks, we have been enumerating
some of the difficulties faced by mining companies which have chosen to operate
in foreign lands. While several nations such as Mexico, Australia, Canada and
the USA have proven to be pro-mining and have not created immense problems for
junior miners in particular, other countries have proven to be much more
difficult. We can add the nation of the Kyrgyz Republic, part of the former
Soviet Union, to the latter category.
One of the mining companies with vested interests in
the Kyrgyz Republic is Toronto-based Centerra Corp., whose stock has just taken
a direct hit based on news that the company has been unable to obtain an
investment agreement from that government on its Kumtor Mine and the fact that
the Republic also stripped the company of three of its exploration licenses at
Kumtor. According to a Financial Post article written by Peter Koven, investors
are concerned that, “…the ownership terms at Kumtor will change for the worse.”
Our own observation is that many of the
difficulties with foreign governments follow a pattern: problem governments are
most cooperative when it comes to development of projects when companies are
pouring money into a country. They are somewhat less helpful when it
comes time for those companies to actually make profits and
take money out of their country.
Although the concept is seemingly devoid of
fundamental logic, we have noticed that markets have a tendency to concentrate
their energy and find balance around “round numbers”. We can recall that during
our early years of involvement in markets, the Dow Industrials spent the
majority of the time from 1962 until 1982 backing and filling around the 1,000
level before finally making their decisive break to higher levels. Most round
number targets, of course, do not last for twenty years as in that reference to
the Dow Industrials and it is relatively short term resistance or support at
these kind of figures that are of present interest.
Particularly noteworthy for the moment is the Dow
Industrial’s struggle to remain above the 12,000 level. As can be seen from the
six-month chart of the “Dow”, that average seems to be barely hanging on and it
is our opinion that a sharp and sustained break below the 12,000 level could
easily signal the beginning of a much more severe wave of selling than we have
seen recently. It is certainly a level on which to focus our general market
attention.
However, the one round number we are most intently
focused on is the $1,000 (all prices US$) level for the price of gold. The
chart of the gold ‘Exchange Traded Fund’ known as “Gold Streettracks ETF” is
most instructive and, in our opinion, holds particularly bullish long-term
implications for the yellow metal.
Please note the “70” level - corresponding to gold
at $700.00 - which was reached (for the second time in history) in spring 2006.
Gold subsequently declined sharply and then began a series of rallies back to
near the $700 level before breaching it successfully in late summer 2007 - after
which gold exploded upward to exceed the $1,000 level within six months.
Please note the almost eerie similarity between the
decline from the peak at $700 in spring 2006 to the decline from the $1,000
level this year. As in the previous example, gold fell by about $150 and began
to build a new base level of chart support. Gold is performing in a markedly
similar manner this time around and, in fact, gold just moved above the $900
spot level this morning, rising about $10 so far in today’s session.
Two questions are evident and important. First, is
gold going to perform as in the earlier example by backing and filling before
moving to new record high levels and, second, if it does, what will be its time
frame? Our best guess is, (a) that it will indeed turn higher and move to new
record levels, and (b) that it will move more rapidly than before due to the
ever-widening credit debacle which is engulfing so much of the financial world.
We believe coming dramatic efforts to stimulate economic activity at all costs
will involve financial policies that lead to fiat monetary creation to an
unprecedented extent - and that those policy, if they indeed eventuate, will
propel gold upward more rapidly than it moved in 2005-6.
We further hold the opinion that should gold
successfully breach the $1,000 level and reach new record highs, that could be
the signal for a turn toward hard money by the public at large and, as several
gold commentators have noted through the years, “There is no fever like gold
fever.” Given the growth in the world’s population, the spread of prosperity
among the newly-industrialized nations and the sheer volume of monetary
aggregates now floating through the world’s financial systems, we believe the
stage is being set for a major, sustained and potentially enormous golden bull
market over the next several years.
At least that is the way we see it from this vantage
point at this time.
This morning’s markets have seen several decisive
moves including gold ahead by about $10 to $904 spot, both mining share indexes
solidly higher, oil down by about $2 per barrel to the mid-$134 range, base
metals broadly lower and the Dow trading at 12,005 near 8:15 AM PDT while the
TSX, probably reflecting lower petroleum prices, was down over 100 points.
Currency markets are relatively quiet with the U.S. Dollar close to unchanged
and the Canadian Dollar moderately higher.
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