A Melman Minute
By: Leonard Melman
August 7, 2008
Market action this morning cannot help but cause
some hard money advocates to wonder if there is an 'invisible hand' manipulating
trading in some manner as once again, after opening in a positive manner, the
precious metals markets encountered severe and unexpected selling early in the
session, turning gains into sizeable losses.
Gold opened about (all prices US$) $7 higher, near
$886, but within an hour that gain had changed into a $10 loss as gold touched
below $870 for a moment, before recovering to the mid-$870s. Silver also turned
an early gain into a loss, dropping to $16.26 at about 7:45 AM PDT while
platinum had also fallen moderately to near $1,580 per ounce. To complete the
picture, crude opened strongly higher, but quickly began to reverse those gains
while the U.S. Dollar opened weaker, but almost immediately began to
strengthen. Financial markets in America opened sharply lower, but then began
to rally, while the TSX remained close to unchanged.
These kind of sudden and dramatic reversals do
indeed raise the question of government interference in the marketplace, but
there is seldom, if ever, actual proof of such intervention. However, our
suspicions cannot help but be kindled from time to time.
Meanwhile, economic difficulties continue to impact
a growing list of nations. We have already mentioned the USA, Germany, Britain
and Spain in this space from time to time, but an important new addition to the
list of troubled economies could be the world's second largest, Japan, as a
recent Reuters story quotes a Japanese cabinet minister as stating that Japan's
economy was deteriorating and was likely already in a recession. Their Index of
Leading Economic Indicators fell dramatically between May and June and
industrial output also fell sharply in June. In addition, industrial output has
now fallen for each of the first two quarters of 2008, fulfilling one of the
classic definitions of an economy in recession.
This chart, which reflects Japan's equivalent of
America's NASDAQ Average, focuses on Japan's technical industries and, as can be
clearly seen, some dramatic weakness began entering that market in early 2006.
Since that time, the index has been cut in half as wave after wave of selling
has driven prices lower.
In our view, Japan has become increasingly
vulnerable to major economic events during the past few years. Growing weakness
in other nations' economies has negatively affected their export industries.
Huge increases in the cost of imported fuel - and Japan produces virtually no
petroleum of its own - has cost them dearly. Massive increases in
transportation prices have also damaged their ability to provide the world with
quality manufactured items at reasonable prices.
A combination of these and other factors may have
influenced David Cohen, director of Asian economic forecasting for Action
Economics in Singapore to tell the Financial Post, "...the latest monthly data
show exports, production, employment, household spending and wages all declining
in June, highlighting concern that Japan may already be in recession...Like the
central bank, investors are aware of the downside risks, but can do little but
watch as the global uncertainties play out, leaving the markets on a roller
coaster."
Like other nations, Japan is also plagued by the
combination of declining economic activity and rising inflation as consumer
price inflation recently hit a ten-year high. That combination has been
referred to as 'staglation.'
Any severe and sustained decline in Japan's level of
business activity could have an impact on our mining industry as Japan, being
the world's second largest economy and also lying close to China, is one of the
latter nation's most important trading partners. If Chinese exports to Japan
slow down, that would likely contribute to the growing sentiment that China's
period of rapid expansion may be hitting a 'bump in the road', one which could
lessen the demand for base and precious metals into the future.
By coincidence, the Associated Press just released a
study by Joe McDonald in Beijing headlined "China not immune to global
slowdown", which raises exactly that question. The article cites the experience
of a major clothing manufacturer located near Shanghai which had grown
accustomed to an almost automatic ten percent annual increase in their export
business, but during 2008, their fortunes have reversed and they now face a ten
percent decline in export sales. Their company vice-president also raised
serious questions about China's domestic economy when he noted that, "We are not
going to switch to domestic sales, because the domestic market is even worse."
(NOTE: We apologize for any delays in completing
our four-part series on China which we had projected would be ready for
publication last week. Unfortunately - or fortunately - an unexpected flow of
other writing commitments has caused a short delay in completing this project,
but we do expect it to be ready for posting on this website within the next two
weeks.)
China is not the only nation where a previously high
level of economic expansion might be encountering some difficulties. Here in
western Canada, questions are beginning to be raised about the once-dynamic real
estate marketplace.
Few cities have a collection of advantages quite as
appealing as British Columbia's capital city, Victoria. Blessed with a fine
climate, stunning scenery, nearby beaches and forests and a steadily expanding
economy based on growing government activities, real estate values have exploded
upward during the past decade, reaching an average price for a single-detached
family dwelling of slightly over C$600,000. However, in the past few months
conditions have begun to weaken with declining sales and rising inventories of
unsold homes, conditions which bear an eerie similarity to those in many U.S.
cities over the past two years. During July, the average home sale price
declined to 'only' C$578,177 while the inventory of unsold homes swelled to
nearly 4,600 - the highest level in ten years!
Perhaps these figures are just a 'straw in the
wind', but they are a 'straw' worth watching.
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