A Melman Minute
By: Leonard Melman
Precious metals markets took it on the chin in early
trading as gold plunged by almost $30.000 down to the $784 level before rallying
back to the mid-$880s. (all prices US$) Observers noted that two possible
reasons included some renewed strength in the U.S. Dollar in world currency
markets as well as a well-publicized agreement by the Saudi oil authorities that
they would begin to increase production. On the latter score, strangely enough,
the petroleum markets rallied and the price of Crude rose to above $136.00 per
barrel. Other precious metals including silver and platinum declined along with
gold.
In early trading as of 7:00 AM PDT, securities
markets are rallying in Canada with the TSX up over 60 points while the Dow
Industrials have fallen back to the 'unchanged' area after an early rally
reversed itself.
Most news released over the weekend and early this
morning appeared to confirm the recent trends which have dominated headlines.
For example, the banking crisis continued to produce negative news with the
world's largest bank, Citigroup, just announcing they plan to fire thousands of
workers in its worldwide investment-banking division. According to the Wall
Street Journal, the banking giant plans to cut one out of every ten jobs in the
investment-banking group, a loss of some 6,500 employees. The bank is cutting
back several of its ventures and is attempting to consolidate and return to
profitable operations following its massive write-downs of late last year and in
early 2008.
Following the widely-publicized oil summit of this
past weekend, the Saudi announcement did manage to capture some headlines, but
it appears to us to be nothing more than minor cosmetics. The world's largest
petroleum producer agreed to raise its production by 300,000 barrels per day
(bpd), but added the caveat, 'if the world needs it'. However, in the same
release, the Saudis blamed the high price of crude on 'speculators', which would
make it appear that they believe the world does not need increased production.
And, even if the Saudis did increase production by the stated amount, the growth
in worldwide demand anticipated for this year alone dwarfs the suggested figure
of 300,000 bpd. The petroleum market's reaction was first to yawn, and then to
rally, making it appear that relief from high oil prices, at least in our
opinion, remains a vague hope, not a looming reality.
The United States Congress seems ready to charge
onto the petroleum playing field with 'corrective' rules of its own. No less
than nine different bills have been put forward to limit speculation on oil
prices and some of these include increasing trading margins on commodity
contracts, limiting the number of contracts which could be held, and,
ultimately, even eliminating speculation entirely and restricting the market to
just producers and consumer.
What is apparent is that these legislators have no
idea of how important the concept of 'liquidity' is to the commodity markets.
Smooth movements in prices require that there be a substantial number of
contracts traded and speculation is an important ingredient in raising those
numbers. Without that added liquidity, when producers or consumers did take
market action to hedge their production or insure delivery of product, the
market could easily tend to lurch sharply and exaggerate moves in either
direction, making price predictions more difficult than they are at present.
Our belief is that law-makers have a tendency to
want to demonstrate that they are 'on top' of important situations and are
capable of offering solutions, no matter what the problem. In our opinion, many
of their 'solutions' simply exacerbate the situations rather than resolve them.
One last topic is price inflation. Mother Nature
delivered a hammer-blow to agricultural production with the immense flooding
which has taken place in the agricultural states such as Illinois, Iowa and
Indiana. According to the Associated Press, over two million acres of prime
farmland has been flooded, wiping out this year's crops of corn and soybean and
driving grain prices higher. We recently showed the long term chart on corn and
today include the one for soybeans, which has just shot up to historic highs
near $16.00 per bushel.
The effects of these huge grain price increases are
spreading far and wide. For example, turkey farms are cutting their herds as it
is becoming impossible to pass on grain cost increases to consumers. Huge
agricultural giants are now being forced to raise prices for chicken and cattle
feed, meaning the next burger or chicken treats will likely cost more in the
near future. Cattle herds are being slaughtered now which is keeping prices of
meat low for the time being, but that action is almost certain to raise meat
prices sharply into the future.
And so, our basic positions remain unchanged. Price
inflation remains a threat, the banking and credit crises are far from resolved
and the potential for massive problems involving the entire petroleum complex
remains high. Therefore, we believe the potential for a major inflationary and
financial crisis seems likely to drive precious metals prices higher over time
and we would attempt to profit from those possibilities by acquiring quality
mining shares which appear likely to benefit from future gains in the price of
the underlying metals.
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