A Melman Minute By: Leonard Melman   NOTE: In order to complete Mr. Melman's forthcoming book on the essential fundamentals of the developing international financial crisis and its relationship to gold and silver, new "Melman Minutes" will be posted only three times per week, each Monday, Wednesday and Friday. The working title of the book will be 'Just a Melman Minute!"   November 2, 2009   Given the uncomfortable realities now involved in commercial air travel, it is an undeniable pleasure to be back home after traveling a recent trip the province of Quebec.  However, we readily acknowledge there is great value in these field trips as it gives us the opportunity to observe developments within the mining industry on a first-hand basis.  In this particular case, we visited a developing gold property in an old/new area of mining activity known as the "Beauce" (pronounced 'Bose').  We give it that designation because, while it has a lengthy historic history of precious metals mining activity, the area has been substantially inactive during more recent decades. Of course, one of the driving forces behind the new exploratory efforts has been the rising price of gold and, accompanying that improvement, the growing ability to raise capital to further exploration efforts.  Therefore, it is of the utmost importance to continue to follow information relating to trends in the prices of the metals (both precious and base) and we are pleased to report that this morning's early activity in these markets has been bullish. Building on renewed weakness in the U.S. Dollar, gold reversed recent declines and   soared by over $20 per ounce to within just a few dollars of its all-time high just above $1,070.  Silver is also stronger and the base metals, on balance, have moved higher as well.  However, there is a troubling feature of mining share activity which must be reported. Please note on the chart of gold's Exchange Traded Fund (ETF) that gold's rally of this morning has returned the yellow metal to the area of its highest levels in history.  However, when we look at the XAU mining share index, a different picture emerges, and one that could have troubling implications in the light of historic comparisons. As can be observed, while gold is near historic break-out highs, the XAU Index is, in fact, near the lowest levels in almost two months.  In terms of numbers, one important item of statistical analysis is the gold/XAU ratio as measured by comparing the price of gold itself with that important mining share index.  During the past month, we note the following: At gold's all time-high in early October, the ratio was approximately 1070/180 or 5.94:1. At this morning's prices, that same ratio is now approximately 1060/161 or 6.58:1. The theory behind following this ratio is that the producing, major mining shares enjoy a powerful leverage over the price of gold and a simple example will illustrate the point.  If we assume that a producing mine has an operating cost of $600 per ounce, then we find that if gold is selling at $800 per ounce, an operating profit of $200 per ounce occurs - all else being equal (which it seldom is).    However, should gold then rally to $1,000, a 25% gain, the operating profit would rise to $400, or a 100% gain!  For this reason, mining share indexes have frequently moved sharply higher, in relative terms, during bullish periods for gold and the norm, therefore, is for the ratio between gold's price and the XAU Index's price to decline. When we observe activity such as the past few weeks when activity in gold is bullish yet the ratio advances, then it is a signal to exercise an extra degree of caution until matters return to a more normal situation. ................... One feature of trading during the period we were absent has been tremendous short-term swings in virtually every market, particularly the general securities exchanges.  For example, this past Wednesday, that average fell significantly by 119.49 points.  It then rebounded sharply on Thursday by 199.89 points only to plunge on Friday by 249.85.  As if to continue this pattern, the Index rebounded sharply this morning, advancing by 130 in early trading. Our interpretation is that projections for economic activity have formed around two contrasting views.  In the first camp, we find those who are convinced economic activity is not only on the rebound, but that improvement will continue to advance over time and lead to sustained recovery in the form of a "V" pattern, namely the recent substantial and rapid decline will be followed by a period of equally substantial and rapid recovery. In the other camp, we find those who are convinced that the recovery is shallow, artificially induced and unsustainable.  Therefore, in their opinion, the recent improvement in data is a chimera, or, as the dictionary would define the term, a fanciful and idle illusion.  This camp expects renewed contraction with extreme opinion extending to a descent into depression and even extreme calamity.  And so, when news releases appear to favor the former, markets rally, and vice versa. This morning's market trading illustrates the point.  Shortly after the opening, the latest reading of the Institute For Supply Management (ISM) Manufacturing Index for October was released and the number came in at 55.7, far exceeding expectations and the Dow took off to the upside, ignoring other data including the bankruptcy filing of CIT Financial, continued woes in the commercial real estate sector and what might be regarded as a frighteningly high number of bank bailouts by the U.S. Federal Deposit Insurance Corporation, with seven such takeovers announced Friday afternoon. One other story seemed to typify the negative news background which continues to make headlines.  We are referring to an article detailing the contraction of values among the ultra-rich, in this case the pricing of luxury villas at major ski resorts.  An article in today's Wall Street Journal gives us details of one home in Aspen which has been reduced from $15.95 million to $9.95 million and another in Sun Valley which has fallen swiftly from $17.9 million to $7.9 million. While it may be difficult to dredge up a great deal of sympathy for the troubles of the wealthy, it must be remembered that such declines also reduce overall economic worth which then reduces the ability to buy other items such as high-end vehicles, yachts, resort memberships or even make mammoth contributions to favorite charities - all of which lead to rising unemployment and diminishing overall economic activity. As if to show that they were truly aware of such events, financial markets have turned sharply lower after those earlier positive openings.  As of 10:15 AM, the Dow Industrials and Canada's TSX Index have returned to almost unchanged after their previous strong rallies.  Precious metals are also retreating somewhat with gold now up about $14 instead of $22 earlier in the session and silver is up, but by only about 25 cents.  Mining share indexes are holding on to small gains and the base metals are presently little changed on the session.  The U.S. Dollar is weaker in currency trading and Crude Oil has rebounded from recent losses. (All quotes US Dollars unless otherwise noted.) Next Melman Minute scheduled for Wednesday, November 4, 2009 ◄  Previous Minute                                                                                                        Next Minute  ►
		DISCLAIMER The information presented above is based on data which we believe to be from reliable sources, but the accuracy of which cannot be guaranteed.  Any opinions or predictions contained herein are those of the editor and are likewise offered also for information purposes only. Any investment decisions should be made only following consultation with registered investment professionals.