A Melman Minute
By: Leonard Melman
August 14, 2008
Greetings once again from our hotel in Yellowknife,
NWT. After spending a day in the splendid and hauntingly beautiful isolation of
the Canadian tundra, it is good to be back in 'civilization' with hotels, jet
planes, full Internet communication, cell phones that work and the other
accoutrements of our modern era. However, it was exciting and encouraging to
observe just how dedicated our mining industry is to the discovery and
development of mineral assets. If only the world at large truly appreciated the
work that is being done.
International attention is once again focusing
squarely on the events in the former Soviet State of Georgia where Russia and
Georgia are engaged in growing hostilities, despite periodic 'cease fire'
announcements..
Several people have wondered why gold has not
responded to such news in a more robust manner as during some past ages, word of
open war frequently sent gold soaring. However, we note that this morning that
the U.S. Dollar has traded higher as many people have used that currency as
their refuge and, as the Greenback has risen, gold, crude and other
dollar-priced natural assets have retreated from earlier advances.
At 7:45 AM PDT the markets we follow have changed
directions from their opening moves. Gold, silver and platinum have retreated
sharply from earlier strong advances, crude oil has backed off from yesterday's
close near $117 per barrel (all prices US$) and the Dow Industrials quickly have
turned losses of over 60 points into gains of about 80. The aforementioned
Greenback was lower at the opening, but has moved upward to now post modest
improvement.
Not surprisingly, these stock advances are coming in
the face of continuing bad economic news, a pattern that has prevailed for some
time. For examples, this morning we have received reports that U.S. price
inflation indexes are now at a 17-year high, the European economic data shows
new evidence of declines and the rate of home foreclosures continues to surge
upward, now more than 55% ahead of year-earlier numbers.
Unfortunately, we have to leave shortly to continue
our travels, but we want to show you perhaps the most important chart of all
from a long-term prospective, the chart of long-term interest rates in the USA
as reflected by movements in the U.S. Thirty-Year Bond contract. Please recall
that bonds move in the opposite direction to interest rates, moving higher on
lower quotes for the bonds and moving lower when bond quotes are rising.
It can easily be observed that the predominate
direction of the chart is upward over the past two decades - reflecting
gradually declining rates - but for the past six years, a prolonged sideways
trading range has developed, between roughly 105 on the bottom and near 123 on
the top.
It is our opinion that the breakout from this range,
when it occurs, will signal the next great trading move in bond trading, and in
the USA's financial stability. If the bonds break out to the upside, and rates
take another new fall, that would likely reflect gradually improving conditions
and a lack of concern for inflation. However, if the bonds drop through the
bottom of the chart, reflecting a move to higher inflation and interest rates,
then genuine and lasting problems for the American economic society would likely
occur.
Therefore, we would offer the opinion that if the
breakout is toward lower interest rates, that would be a poor background for the
precious metals, but if the breakout indicated steadily rising rates, reflecting
growing concerns about rising inflation, that would be positive.
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