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!"   December 7, 2009   Gold continued to fall in Asian overnight trading, reaching a low of about $1,134 by the time American commodity markets re-opened this morning.  Some buying then came in and the price rallied back to near $1,144 while silver has had a comparable range of $17.97 to $18.08.  In each case, the drop from the highs of last week to the lows of this morning has been in the range of 7-8 percent. Before anyone comes to the conclusion that the precious metals bull market has come to a sudden end, there are two pieces of history which must be considered. In the first case, these sudden declines are not at all comparable to those which ended the gold and silver bull market that peaked in January 1980.  In the previous case, the descent from the tops was vertical, it was powerful, and virtually no support of any sort appeared until gold had fallen by over $400 and silver had been smashed down from fifty dollars to barely fifteen.  The differing nature between the current declines from the devastation of 1980 is clearly evidenced by the long-term chart of silver. In the second case, a study of market history has shown that sharp, corrective moves against the major trend are the norm, not the exception.  An examination of the Dow Jones Industrial Average historic record clearly demonstrates this principle.  Virtually every one of the ten greatest one-day percentage gains in the history of that average took place during a period of devastating bear markets, following a period when the markets had declined sharply.  Seven of these extreme rallies took place in late 1929, 1931, 1932 and early 1933. It is our opinion that these sudden buying waves occurred because many investors wanted to take advantage of extremely low 'bargain' prices while other buying developed from those taking profits from previously-established short positions. In terms of one-day percentage losses, the record is the reverse with many of those sharp declines coming after periods of prolonged advances.  Examples include a huge decline on July 21, 1933 after the Dow had more than doubled from its historic low of 41 to 96.26; a loss of 554 points on October 27, 1997, right in the midst of the greatest rally in Dow history; and on August 31, 1998, later within that same bull market, when the Dow fell by 512 points. We believe that these selling waves occurred as a result of sellers fearful of seeing enormous gains evaporate and new short positions being taken by those who believed that the markets had reached an important peak. The great distinction between important, historic reversals such as the savage stock market declines of late October 1929 - which indeed signaled the end of the "Roaring Twenties" bull market as well as the early 1980 metals' reversals was that these declines continued and accelerated to the downside.  That is what we must watch out for.  A quick reversal by itself holds no great meaning as long as the intermediate and long-term trends remain intact - which, in fact, is true (so far) of the present case.  The great danger would occur if those trends were violated. We are beginning to look upon South America as a continent of rising political dangers.  Nominally socialist regimes are presently in power in important mining countries such as Ecuador and Chile, but to date they have not yet represented overt threats to the mining industry.  However, the story is markedly different in both Venezuela and Bolivia.  In the former case, President Hugo Chavez is continuing his policy of expanding government domination over important industries, with the latest action being the seizure of three additional banks because, as the government claims, "...the owners illegally used deposits for their own enrichment."  This continues a pattern of government action against mining, petroleum, concrete and other industries - in each case strengthening the government's hold over previously free markets. However, it is the election of Evo Morales to a second term as President of Bolivia which we believe represents an even greater concern.  There are two reasons to justify our fears. First, if possible, Morales is even more extreme in his socialist beliefs than Chavez and this is demonstrated by his nationalization of Bolivia's energy industry in 2006, his tax grab against natural gas production and his recent pledge to launch state-run enterprises in paper, cement, dairy, drug, iron and lithium production.   Next, we are alarmed at the analysis of voting in the just-completed election.  Not only did Morales receive over 60% of the total vote to earn a landslide victory, but he received support from virtually the entire native population because, as noted by Forbes magazine, "...voters backed his left-wing reforms asserting greater state control over the economy and increasing social spending for the poor." The rest of South America's political leaders are not blind, and if they see that socialist promises appear to be the means of achieving electoral success, we believe there is a strong possibility of such tactics spreading to important other mining nations such as Peru and Columbia. Should this trend spread, it could have serious consequences for those mining companies which have already invested heavily in those nations. Financial markets this morning have opened mixed with the Dow Industrials up by about 30 points as of 7:30 AM PST while Canada's TSX, reflecting lower resource prices, was off about 60.  Gold and silver continued to show net losses, trading near $1,141 and $18.00 respectively while all base metals were lower as well.  Mining share indexes extended their sharp declines of Friday with both XAU and HUI showing additional losses of about three percent so far in this morning's session.  America's Greenback continued to rally moderately with the DX Index approaching the 76 level while crude oil was down sharply, falling to just above $74.00 per barrel.  Crude Oil is beginning to show some real weakness of late and we will take a closer look at this important resource commodity in Wednesday's MM. Unfortunately, your editor has to leave early this morning to attend to business in the provincial capital of Victoria, but we will resume our normal timetable on Wednesday. - - - - - All quotes US$ unless otherwise indicated. Next Melman Minute scheduled for Wednesday, December 9, 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.