A Melman Minute By: Leonard Melman   August 21, 2008 Watching today's markets in action reminds me of nothing more than the title to one of the true "Golden Oldie" songs from the earlier part of the 20th Century, "What a difference a day makes, 24 little hours..."   Just one or two days ago, who could even imagine the scope of the dramatic moves we are seeing this morning?  Just a very short time ago, the world in general and the financial world in particular were wallowing in uncertainty as: * - The price of oil was heading downward with great force * - The US Dollar was gaining strength steadily * - Precious metals prices were plunging * - The American stock markets were bounding higher * - Junior mining share quotes were dropping like stones * - The resource-based Canadian Dollar was hitting multi-month lows So, what do we find as of about 9:00 AM PDT this morning, but sudden and dramatic reversals in all those market indicators?  Gold is sharply higher at $834, up by over (all quotes US$) $20 this morning and up by $60 since the intraday low of just three days ago.  Silver is up by over fifty cents and platinum is $68 higher.  Crude oil has soared by almost six dollars, back to the $121 per barrel area and the US Dollar Index is down by a significant .68, a very large daily move for that indicator.  To complete the picture, the Dow Industrials were down nearly 100 points shortly after the opening while the TSX Index in Canada was ahead by over 200 and the Canadian Dollar had sharply reversed itself by rising over 100 basis points to $0.9561 versus the Greenback.  In addition, the base metals are making particularly powerful gains this AM! Will the real markets please stand up! In our opinion, the present situation includes the reality that the long-term major trends for the precious metals (bullish), the financial markets as measured by the Dow Industrials (bearish), crude oil (bullish) and the US Dollar (bearish) remain intact.  However, the sharp contra-trend moves in those markets over the past three months or so constituted an important correction against the primary direction of those trends.  However, the corrections became overdone in the short term and we are now seeing rebounds from those corrections. The size of the new moves is vitally important.  If they prove to be quick and unsustainable, then the important corrections will likely resume in short order.  However, if these new movements, that is the moves against the directions of the major corrections (but in accord with the major underling trends) are sustained, then we could see a move back to new historic highs in the precious metals, crude oil and the C$ and new trend lows in the US Dollar Index and the Dow Industrials.  Clearly, trading for the rest of this week and into next week could be of truly important significance. Two stories directly relating to our world of mining are worth noting.  In one, the Financial Times carried the headline, "Xstrata closes Falcondo nickel operation."  The article informs us that, "...Falling nickel prices and high energy costs have forced Xstrata,  the Switzerland-based mining group, to shut down a ferronickel mining and processing operation in the Dominican Republic until market conditions improve."  That mine had been producing 29,000 tonnes of nickel per year, or two percent of the world's primary supply, before the shut-down.  The company noted the plant would be shut down for at least four months, during which expensive diesel power generation would be replaced by cheaper coal-based power. The FT article points out the fact that the mine closure reflects the growing pressure on producing mines to continue operating at a profit.  One expert, Charles Cooper, mining analyst at London-based Evolution Securities, was noted as saying, "...Xstrata's decision had rattled a few cages and other mining companies were likely to follow suit and suspend operations if nickel prices remained low. We would point out that a fundamental law of economics could easily enter the picture, namely that if a sufficient number of presently-producing mines close, thereby removing their newly-mined production from the world's supply equation, that in itself would begin to put upward pressure on nickel prices. The other article notes that silver mining giant, Fresnillo, is keeping a close eye on the troubles many junior are having regarding raising sufficient cash to continue exploration - or even to stay in business altogether.  Since Fresnillo is a solid money-earner, showing pre-tax profits of over $200 million in their most recent quarter, they are in a position to acquire promising projects that may come into the marketplace as juniors are forced to divest their assets.  The company told the Financial Times, "...It may be a good time to acquire projects.  Prices could be lower as some junior companies are running out of money." Mining history is replete with examples of projects being transferred from weak financial hands into stronger one during periods of fund-raising difficulties.  It appears that several cash-rich majors may indeed hold the opinion that we might now be entering just such a period. In our opinion, some caution might be in order regarding trading these markets as enhanced volatility raises the level of risk, particularly for short-term investments. ◄  Previous Minute                                                                                                         Next Minute  ►
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