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 11, 2009   Perhaps the greatest fault of many analysts is that once they have staked out their positions, they fail to recognize that other deep thinkers may have adopted positions directly opposite from their own.  In an attempt to avoid this fault, we have made it a practice to regularly study opposing points of view and attempt to answer their objections, logically and reasonably if possible.  This morning is such an occasion. This line of thinking was prompted by an article in this morning's Wall Street Journal, written by Liam Denning, and carrying the eye-catching headline, "Gold Trades on Luster and Bluster." In essence, Mr. Denning seems to agree with Lord Keynes evaluation that gold is nothing but a "barbaric relic."  Denning goes to great pains to point out that gold's utility value is virtually nil.  "You can't eat, drink or burn gold...Unlike oil, gold isn't consumed..."  He then disparages the argument that a looming gold production slowdown, which he refers to as 'peak gold', could drive the price of gold sharply higher, since, in his opinion, gold itself is rather unimportant and meaningless, given its lack of utility. His article then turned toward monetary arguments which have been used to justify gold's historic high prices, declaring that such standards as money supply, debts and deficits simply don't matter over time, and concludes that gold is actually acting in the manner of the kind of high risk investments against which gold is supposed to protect us.  We happen to agree in a moderate manner that gold's fundamental uses such as jewelry, electronic connections, dentistry, gold plating and so forth do not, by themselves, justify gold's price at over $1,000 per ounce.  However, it is our belief that such considerations form only a small portion of the total demand for the yellow metal.  The rest is provided by long-standing monetary considerations, and in this area we profoundly disagree with Mr. Denning. We find that there is actually an amazing correlation between the historic devaluation of the U.S. Dollar's purchasing power and the rise in gold's price.  If we use the range from about $100 to $200 established during the first great golden bull market which lasted from 1972 through the end of 1974 as our guide, we find these truly startling facts. Gold is now trading at about five to ten times the price established during that era.  Using the government's own statistics, we find that from 1970 through 2008, the price of all commodities increased by a factor of 5:1; chemicals increased 8:1; fuels increased 14:1; metals and metal products 5.5:1 and transportation equipment by 4.1.  In other words, the increase in gold's price over almost four decades has very closely mirrored the diminished buying power of the U.S. Dollar in terms of real goods. From a monetary standpoint, between 1970 and the present, the narrowest definition of money supply, M1, increased by 7:1; a wider definition, M2 increased by 13:1 and the widest definition, M3, increased by 15:1 up until early 2006 when that data series was officially discontinued.  All of these figures correlate almost perfectly with the move in gold from its low of $105 in August 1976 to the present. The situation in terms of per capita national debt is remarkably similar.  In 1975, at a time when gold's price was declining to just above $100 per ounce, the per capital national debt was about $2,520 and the relevant figure for today is approximately $36,000 - a factor of 14:1 while at the recent peak of $1,225, gold had increased by about 11-12 times over - a stunning correlation. Accordingly, we disagree with Mr. Denning.  We believe that there is strong evidence that gold reacts to financial data in an inverse relationship, meaning when financial matters appear to be moving toward future stability, gold falls and when matters appear to be moving toward future instability, gold rises - and we offer as evidence the fact that during the past decade, gold's rise to new highs has taken place within the same time frame as record growth in the American governmental debt, deficits and monetary creation.  It appears to us that this is hardly coincidental - and action now pending before Congress suggests further that matters could deteriorate in the near future. We are referring to the introduction, not at all surprising as we noted some weeks ago, of a resolution that Congress must pass an increase in the National Debt Limit which now stands at $12.104 trillion dollars, while the current reading of that debt stands at near $12.090 trillion - meaning there is virtually no room whatsoever under current law for additional debt. What is truly amazing in historic terms is the size of the new limit as suggested by "responsible" Congressional leadership.  Congressional Democratic leaders, who now control every important law-making department, are calling for a one-shot rise to just under fourteen trillion dollars, an increase of more than $1.8 trillion for the next year alone, a figure, which by coincidence, will take Congress through the 2010 November elections. Back to our original theme in this commentary, we see no reason, despite the negative attitude toward gold represented by articles such as Mr. Denning has written, to change our basic long term position which remains that long-term debasement of the international financial situation is taking place, a debasement led by American monetary authorities, and such debasement will lead to growing instability - and such instability, in turn, will lead to higher prices for gold and silver. Lest anyone think that the situation is both stable and salvageable, we would point to an article of unprecedented seriousness which appeared this morning.  Ever since childhood, we have learned that the Ancient Greeks were among the most knowledgeable and cultivated peoples who have ever inhabited this planet.  But now, to use a trite phrase, those historic giants such as Socrates, Aristotle, Demosthenes and Hippocrates must be rolling over in their graves when they see the sad financial state into which their modern-day nation has descended.  Fitch bond ratings agency has just downgraded the status of debt issued by the Greek government to 'junk bond' status because in their evaluation, there is no way for that government to legitimately pay both principal and interest on its debt.  There is open talk of an actual bankruptcy filing against the Greek government by bondholders who see no other way to recover their investments, and the situation is further compounded by the fact that many of Europe's most important banks hold billions of dollars in that nation's debt paper as assets in their own capital statements. Yes, we will stick with our long-term belief in bullishness for the monetary precious metals. Unfortunately, at least for today, we appear to be out of step with the current markets as gold and silver have both been hit with yet another spate of selling as gold has fallen to an intraday low of $1,108 while for silver their daily low has been $16.87.  As of 10:10 AM PST, the respective quotes are $1,116 and $17.01.  Base metals are slightly ahead so far today, but major mining share indexes have followed gold and silver to the downside. Financial markets are split with the Dow Industrials ahead by 52 points while Canada's TSX Index is off by a similar amount.  The U.S. Dollar Index is continuing its latest rally, Crude Oil has traded as low at $69.46 per barrel and long-term interest rates, as measured by the TYX, continue their recent rise.  (see chart). - - - - - All quotes US$ unless otherwise indicated. Next Melman Minute scheduled for Monday, December 14, 2009.      ◄  Previous Minute                                                                                                        Next Minute  ►
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