A Melman Minute
By: Leonard Melman
One of our policies at "The Melman Report" has been
to avoid political discussions whenever possible. However, we occasionally come
across a statement by a political leader that is so loaded with controversy that
some commentary seems appropriate. A recent statement by American Presidential
hopeful Barak Obama appears to fit that requirement.
Perhaps in an effort to curry favor with the
environmental community, Obama was quoted as stating that it was time for
America to break its addiction to what he referred to as "dirty oil."
Presumably, this means oil that is obtained through processes that involve some
levels of pollution or disturbance of the earth's eco-balance. In fact, what he
was referring to was oil purchased by Americans which was produced via
operations in Alberta's tar sands.
As an avid hiker and backpacker into wilderness
areas and a lover of fine scenery, your editor is as personally concerned about
clean air, clean water and environmental considerations as most people, but
there are also times when comparative realities must be taken into
consideration, and it appears to us that this is one such occasion. America
needs to import massive quantities of petroleum on a daily basis. It presently
imports more from Canada than any other country and it stands to reason that if
America diminishes its importation of oil from Canada, it would have to increase
its importation from other nations.
Who are these other nations? According to a list
published by Canwest News Service, that list includes - in order of magnitude -
Saudi Arabia, Mexico, Nigeria, Venezuela, Iraq, Algeria, Angola, Russia, Virgin
Islands, Brazil, Britain, Kuwait, Colombia and Ecuador. With a very few
exceptions such as Virgin Islands, Britain and Brazil, it is hard to imagine a
list more filled with countries who are more embroiled in internal wars,
rioting, hatred of America, drug trafficking, Marxist doctrine and virtually any
other form of civil and national unrest imaginable.
For a major Presidential candidate to declare that
importation of oil from a stable and reliable ally such as Canada is to be
reduced and, by implication, importation from that tumultuous list is to be
increased, strikes us as the height of irrationality and folly. It will be most
interesting to see if Obama reconsiders and recants. In our opinion, he should
do so without delay.
There once was a time when the major consideration
in bringing a prospective mining property into production was the geology of the
project, the economic realities and the quality of the management team
assembled. Unfortunately, those days appear to be gone forever as aboriginal
relationships, environmental complexities, immense government bureaucracies and
foreign political considerations have assumed important roles in the development
of mining projects. It is the last that has drawn our attention of late. Three
stories in particular are worth discussing.
First, Centerra Gold management just reported that
the outlook for the company may be improving and several members of the
management team are reported to be buying shares at depressed levels. The
reason for their optimism has nothing to do with new resource estimates or such,
but rather is a reflection that the government of the Kyrgyz Republic, which had
previous failed to approve an investment agreement, might now be reconsidering
their regulatory stance regarding the important Kumtor project.
Second, Aurelian Resources has just seen its
prospects improve, but again it is not because of any spectacular new discovery
or such. Rather, it is because the Ecuadorian government, which had previously
approved a new mandate requiring a re-writing of that nation's mining law, might
be reconsidering that decision and might be heading toward less Draconian
measures.
Third, Crystallex International Corp. and Gold
Reserve Inc. saw their share prices head higher in the past few days. Again,
this was not because of any fundamental mining change but rather because the
Venezuelan government, under the leadership of Socialist/Marxist Hugo Chavez,
might reconsider earlier decisions to deny or cancel the companies' mining
permits.
In each case, geo-political considerations, many of
which are utterly beyond the control of the companies involved, have become
dominant factors in share pricing. That is a risk that mining share investors
now have to take into consideration in project evaluation.
A few days ago, we discussed the concept of
confirmation as it relates to market averages. The concept also holds true in
terms of historic relationships between various market categories. One of the
strongest historic relationships of which we are aware is the concept that gold
generally moves in the opposite direction to major securities markets. While
there have been periods of time when the concept has not held true, such as
2002-2007 when both markets moved upward in tandem, the number of opposite
directional moves has been substantial.
With this in mind, please examine the one-year
charts of the Dow Industrials and the GLD gold Exchange Traded Fund.
The chart of the Dow Industrials now shows a new
yearly low and a clear breakdown below previous support. A bearish pattern of
'declining tops' including 14,200 last October, 13,800 last December and 13,100
this May has emerged and the general appearance of the chart is 'hard down.'
On the other hand, the chart of GLD has recently
tested support in the 84-85, which has now held firm on three occasions, and has
now broken out decisively above the 90 level. Unlike the chart on the Dow, the
chart for gold's proxy appears to be gathering strength, perhaps for a near-term
assault on gold's all-time high just above the $1,000 level. (All quotes US$)
One of our other indicators has just flashed a
strong bullish signal. We are referring to the relationship of the spot price
of gold in US$ versus the Dow Jones Industrial average. At 8:15 AM PDT today,
the two numbers stood at $925.20 and 11,388 respectively, creating a ratio of
12.3 to one - the lowest such ratio in many years. This indicates to us that
the case for gold is growing stronger over time while the financial markets are
growing relatively weaker.
Time will tell - but the number appears significant.
Yesterday's explosive markets which saw oil up about
five dollars, gold ahead by $35 and the Dow down by over 360 have been followed
by a much quieter session so far this morning with the Dow down about 70, the
TSX close to unchanged, oil trading near $141 per barrel and gold, as mentioned,
at $925.20, up by about $8. Other precious and base metals are close to
unchanged, except for silver which has risen to $17.43 per ounce and copper,
which is once again challenging the $4.00 per pound barrier.
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