A Melman Minute
By: Leonard Melman
July 10, 2008
Action in the precious metals this morning has been
particularly strong and, as of about 7:45 AM PDT, (all prices US$) gold was up
by about $15 into the low $940s while silver and platinum both advanced
strongly. Silver looked particularly attractive and has once again surpassed the
$18.00 per ounce level. Base metals pare putting on a truly powerful display
with copper up by six cents, nickel once again approaching the $10 per pound
level while zinc and lead have recovered aggressively from recent oversold
levels with zinc (Zn) up seven cents per pound and lead (Pb) up by ten cents.
Crude is slightly higher near $137 per barrel and the U.S. Dollar is trading
lower in currency markets. Securities markets in the USA are slightly higher
while the TSX is up by over 100 points.
Gold's chart continues to take on an increasingly bullish tone, as indicated by
the chart on gold's proxy, the ETF known as "Streettracks." If gold can exceed
spot $950, a clear breakout to the upside will have taken place, which we
believe would indicate a potential rapid move upward to re-test the $1,000 per
ounce level.
Several days ago, we wrote a MM describing the increasingly perilous situation
which was developing between Israel and Iran. During the past two days there has
been an escalation of tensions with reports that Iran has now initiated testing
of medium-range missiles which could strike directly at Israel and apparently
have the capability of carrying nuclear weapons. The most recent reports came in
earlier this morning and are responsible for much of the positive action in the
precious metals markets. We will state matters clearly once again: this is
perhaps the most dangerous potential confrontation the world has had to deal
with since World War Two. Neither country can be seen as backing off from their
strong, conflicting positions nor can the world ignore recent developments which
would indicate an acceleration of tensions.
Europe is becoming a quagmire of escalating troubles and one of the most serious
difficulties they may have to face is the petroleum complex story we alluded to
yesterday involving Russia.
While many observers have been focusing their attention primarily on America and
China, European economic information points toward a growing litany of problems
for that important economic area as well. For example, the Wall Street Journal
just carried an article headlined, "Spain faces Recession, Threatening Euro
Zone" which detailed growing unemployment which is now approaching 10%, rapidly
falling real estate values, falling retail sales, problems with soaring oil
prices and their own accumulated credit problems. Recent Financial Times
articles point to disappointing industrial output in Germany and we also note
severe problems which now afflict the U.K. housing market.
Conditions in that market have deteriorated so fast that one British
homebuilding company, "Imagine Homes", recently placed an advertisement in the
"Sunday Times" of London that reads, "..if you buy an investment property from
Imagine Homes, we will cover your mortgage payments for the first five years."
Real estate values are falling sharply in the U.K., mortgage money is hard to
find, home sales are falling like a stone and it is the combination of these
conditions that has led to, in our opinion, desperation ads such as the Imagine
Homes placed.
Given the growing list of troubles European nations are now facing, the last
thing they need is a new and potentially crippling increase in the cost of
heating homes during the coming winter - and yet that is exactly what they may
face. A Reuter's article originating in Moscow quotes the Russian gas export
monopoly OAO Gazprom, as follows: "...(Gazprom) said yesterday that its import
bill for purchases from Central Asia may more than double next year." (our
emphasis)
The story then informs us that Gazprom will, "...demand a crushing price rise
for its exports to Ukraine" and the Ukraine is the source of much of Western
Europe's home-heating gas supply, thereby creating a dire threat to the economic
well-being of hundreds of millions of Europeans. As Gazprom's CEO was quoted,
"...As far as gas prices are concerned, the situation for end users is becoming
quite dramatic." (our emphasis again).
These price increases are expected to kick in beginning January 1, 2009. In
terms of numbers, the prices could more than double from $180 per thousand cubic
meters all the way to near $400. The article also noted that in the event crude
oil prices reached near $250 per barrel, the contract price for 1,000 cubic
meters of gas could reach $1,000 - more than five times the present level!
Many petroleum optimists cling to the hope that somehow petroleum production can
easily rise to keep even with or ahead of rising anticipated demand.
Unfortunately for their case, ConocoPhillips, America's third-largest oil
corporation, noted that due to equipment maintenance requirements, its
production actually declined in the just-completed quarter. Not only that, but
the company also reported that costs of production, particularly higher utility
prices, would likely lead to higher end-product costs.
The ongoing picture for the oil industry continues to show supply difficulties,
rising worldwide demand, rising costs and, particularly for natural gas, huge
price increases for the consumer markets.
Many economies of the world are encountering growing difficulties and appear
less able to handle petroleum complex cost increases. Tomorrow, we will focus on
"Merry Old England" - but that is a misnomer if the number of economic articles
dealing with rising unemployment, credit market tightness and falling real
estate values in that nation is any indication of the true state of affairs.
The interlocking array of problems continues to spread worldwide.
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