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 12, 2009   As gold eclipses one previous high after another, many observers are now beginning to use words such as "mania" or "frenzy" to describe these powerful gains.  We think otherwise.  In fact, in our opinion, it is the U.S. Dollar that we believe is being held up only by unjustified faith and it is gold that deserves to go from strength to strength.  Our underlying reason for maintaining this stand has to do with the word "reality". One reason for this line of thought is the growing plight of many state governments within the United States of America.  Press releases from the nonpartisan Pew Center on the States highlight the fact that a multitude of states, including such giant economic movers as California, New York, Arizona, Illinois, Michigan, Wisconsin, Oregon, Florida, Nevada and others are facing staggering budgetary shortfalls and, as a result, are planning to curtail many of their expenditures. In fact, Michigan's Democratic Governor Jennifer Granholm recently told the Wall Street Journal that she had directed agencies in her state to prepare for Draconian budget cuts of as much as 20% - or one dollar in five - for the coming year as projected revenues plunge far below expectations.  The problems cut across political lines as Indiana Republican Governor Mitch Daniels reported state revenues for the first four months of the current fiscal year were more than $300 million below expectations and state agencies should plan for an additional ten percent budgetary reduction on top of the five percent announced earlier in the year. The overall situation is so bad that, even when existing federal government stimulus efforts are taken into account; state budgets still face a monstrous combined deficit of about $142 billion for fiscal 2011 alone, on top of a projected $113 billion in the current fiscal year.  Borrowing is hardly an option as many states are tapped out when it comes to debt ceilings and economic activity is simply not growing at a rate sufficient to alleviate the problems to any important degree. So, what to do - and the answer to that question underlies our primary belief in the unreality of the situation, for the growing expectations are that the federal government simply will not 'allow' the states to curtail 'essential' or politically desirable programs. Demands for federal government action abound and here are some of the remarkable quotes from that article. "...economists and lawmakers are pressing for another round of federal stimulusaid to states and localities..." "...Mark Zandi, chief economist of Moody's Economy.com said, 'Without more help to state and local governments, the resulting budget cuts will become a very significant drag on the economy..." and, "...The U.S. Conference of Mayors said last week that cities faced drastic spending cuts without additional federal aid..." And, how will the federal government perform the fiscal miracles required to satisfy these requests/demands, one might ask?  The only seemingly valid answer is through outright monetization of debt.  Of course, government advocates dislike such terms, so they refer to recent actions of the Federal Reserve to simply buy up federal government with newly-created Federal Reserve paper as "Quantitative Easing."  But it is the same process, namely creating money 'out of thin air', with no underlying valid debt or hard asset basis - and the assumption that such 'money' can retain value over time is the 'unreality' we refer to. There is also a second unreality which appears to obsess those currently in power in Washington, and that is the belief that industry and commerce can thrive mightily regardless of how many legal and regulatory complications, instructions and additional expenditures are inflicted upon the industrial and marketing machinery which comprise America's free market economy.  The list of new and complex laws continues to grow; complexities and costs are being added seemingly without limit; and yet the powers-that-be seem not at all concerned with exactly how these laws are to be obeyed while maintaining maximum efficiency and profitability, without which we believe that meaningful gains in employment will not be possible. As a result, many large holders of American Dollars continue to diversify out of Greenbacks and into other monetary instruments or precious metal and other commodity resources, and it is our opinion that gold's recent power move is a reflection of that concept. It is also worth noting how well resource-based economies have performed in comparison to those reliant on monetary expansionist policies and we use the Australian Dollar as our example.  Please note the almost perfect correlation between the onset of America's most virulent stimulative actions in October-November 2008 with the beginning of a major rally in the A$ which has seen that currency rise more than fifty percent in less than one year when compared to the U.S. Dollar. There is yet another piece in the gold puzzle that is beginning to emerge and that is a looming supply shortage.  According to the U.K. Telegraph, "...global (gold) output has been falling by roughly one million ounces per year since the start of the decade..."  We also learn that Barrick Gold is producing at a rate of about eight million ounces per year, but new major finds are becoming more difficult to develop and many existing mines are being reduced to processing low quality ore - with commensurate lower rates of recovery - as a significant percentage of high-grade reserves were depleted during years of lower gold prices. And so, we offer our opinion that monetary-based demand for the monetary precious metals could easily continue to increase as fears of growing US Dollar weakness mount while the world of gold may indeed be facing growing future supply reduction.  Quite a combination, should it play out according to this script. Financial markets this morning are relatively quiet with both the Dow Industrials and Canada's TSX Indexes close to unchanged as of 8:30 AM PST.  Precious and base metals are moderately lower on balance; mining share indexes are down by about two percent; crude oil is off sharply to below $77 per barrel and the U.S. Dollar is slightly higher in currency trading. ................ All quotes US$ unless otherwise noted. Next Melman Minute scheduled for Friday, November 13, 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.