A Melman Minute
By: Leonard Melman
More often than not, it is a worthwhile exercise to
review one's fundamental, underlying thesis to determine exactly where today's
events fit within that context. Given that "The Melman Report" is an
information website closely allied to the junior mining industry, our interest
lies in the direction of understanding and interpreting influences which will
affect the prices of and demand for the base and precious metals.
Of those metals, because of its historic importance
and worldwide interest, the most important would appear to be the fabulous
yellow metal, gold.
We hold to the belief that over time, gold, being
real value in and of itself, is the counter-measure of unbacked, fiat currencies
and, by far, the dominant fiat currency in the world today is the United States
Dollar, commonly known as the 'Greenback'. We also hold to the belief that as
faith in the stability and value of the U.S. Dollar strengthens, gold has a
tendency to weaken and as faith in the stability of the Greenback diminishes,
gold has a tendency to strengthen. Therefore, much of our attention and focus
is directed toward the background of information relating to the American
currency.
During recent years, the value of that currency has
declined markedly and no widely-accepted measure of that decline is more widely
recognized than the market index known as "DX", which measures the American
dollar against other important (but also fiat) currencies. In order to
demonstrate just how dramatic this decline has been during the past several
years, we are once again including a long-term chart of that index.
Two things become clearly evident from an
examination of this chart. First, the long downtrend that began early in 2002
remains in effect. Second, despite all the hot air, blather and supposed
important commentary from Fed Chairman Bernanke, President Bush and other high
government officials about 'defending' the dollar and the importance of a strong
currency, the recent, much-publicized dollar rally has, to date, been nothing
but a minimal interruption to the long term deterioration of the Greenback.
We offer one last point to cover in this review. In
our opinion, nothing has scared the world's financial markets as much as the
fear that unlimited creation of dollars could lead to the ultimate collapse of
the Greenback as the world's reserve currency, and, if that should occur, the
world's financial markets could be thrown into utter turmoil. Currency traders
frequently point to the U.S. Balance of Trade and government budgetary deficits
as the primary causes leading to that currency creation.
Therefore, for the purpose of this analysis,
anything that causes the Balance of Trade to remain at today's astronomically
high levels - or perhaps to grow to even greater proportions - is of the utmost
importance and nothing is a greater current concern than today's high petroleum
prices, given that America imports over four billion barrels per year.
All of this is a prelude to a discussion of the
American Congress' ongoing hearings on the price of petroleum. In our opinion,
in their search for a politically palatable scapegoat, America's Congressional
leaders have missed the most important and critical point by a proverbial mile.
Today's headlines are filled with reports that
various providers of 'expert' testimony point to 'speculators' as the cause for
ultra-high petroleum and gasoline prices. Some of this 'evidence' declares that
if only speculation could be prevented, the price of petroleum would collapse.
Several of those experts from prestigious companies such as Oppenheimer & Co.,
PFC Energy, Masters Capital Management and Energy Security Analysis were quoted
in a National Post article as telling Congress that, "...the government needed
to intervene to stop speculators driving oil prices to unjustified levels."
Michael Masters, portfolio manager at Masters
Capital Management, was quoted as testifying that if Congress did limit
speculation, "...Prices would probably drop over a reasonably short period of
time back to somewhere closer to the marginal production cost of oil, to $65 to
$70." (All prices US$)
We hate to disagree with such a distinguished
gentleman, but frankly, we believe he is overlooking the one most important
fundamental fact of all which is this: the existing pools of
economically-producible petroleum are being depleted at a rate which petroleum
specialists agree is at least five times the rate of newly discovered and
economically viable petroleum resources. It is also worth pointing out
that the world's refining and petroleum transportation facilities are stretched
to near the limit of their productive capacities, so, even if crude production
suddenly increased dramatically, the net flow of consumer petroleum products
would have a hard time keeping up with present demand, never mind the
anticipated huge increases in that demand over coming months and years.
It is interesting to note that the long-term chart
on petroleum confirms - but in the opposite direction - the price action in the
U.S. Dollar. As can be seen clearly, since 2001 petroleum has been in a strong
uptrend and, despite periodic strong denunciation of speculation, the
interruptions in that strong uptrend have been limited and eventually overcome
with further strong rallies.
We believe the recent decline of a few dollars per
barrel over the past few weeks is simply another correction within an overall
rising trend.
Accordingly, we believe insurance positions in
precious metals mining shares should be maintained and added to when market
conditions so indicate.
Markets this morning do indeed reflect the sudden
burst of Congressional interest in petroleum with crude down about $4.00 per
barrel to near $133, gold off about $9.00 to near $880 per ounce and the other
precious metals close to unchanged. Base metals continue to weaken on balance
with lead falling below 80 cents per pound for the first time in over a year.
Financial markets are mixed with the Dow Industrials about 60 points higher,
ahead of the Federal Reserve Board's expected interest rate announcement later
this morning, but the TSX is showing further weakness after yesterday's heavy
selling, down about 100 points near 9:00 AM PDT. Mining shares are lower on
average and currencies are close to unchanged in quiet trading.
Tomorrow morning we plan to take a hard look at the
base metals' fundamentals. Their performance over the past several months is a
matter of some real concern.
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