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 18, 2009   Perhaps your editor is giving away his age by the following comment, but two of our favorite singers through the years have been Al Jolson and Eddie Cantor.  On that score, we were reminded of Cantor's famous song, "Makin' Whoopee" by the recent actions of a New York State court that seem to apply to the world in general and to gold and silver in particular.  In the song, a gentleman with a tendency to 'stray' has found that his conduct has led to divorce proceedings and the verses go... "He doesn't make much money, five thousand dollars per, Some judge who thinks he's funny, says 'you give six to her' So he says 'judge, what if I fail?' the judge says 'budge, right into jail' You'll find it's cheaper, for you to keep her, than "Makin' Whoopee" The court action that reminded us of Cantor's song had to do with a labor settlement involving New York City's Metropolitan Transit Authority (MTA).  MTA itself just announced major cuts in services as they attempt to stem heavy operating losses now amounting to almost $400 million per year.  According to the judge's labor settlement, MTA must pay labor unions $541 million in wage increases over the coming three years. Exactly how a system that is bleeding almost $400 million per year is supposed to come up with an additional one-half billion dollars was never addressed.  It is as if, just like Cantor's judge, all a court is required to do is issue orders, and if those orders fly in the face of reality, that is apparently no concern. Well, in the real world, it is a great concern, and we believe that as these 'unreal' judgments and political/bureaucratic actions accumulate, the distortions that are created will demand greater and greater money creation in order for the economy and government to continue functioning.  In our opinion, that accumulation will be yet another factor leading to downward pressures on the U.S. dollar, despite that currency's current spate of strength which has seen the U.S. Dollar Index (DX) rise from near 74 to the 78 area of late (see chart). ................ Buried inside the stack of financial news items we receive each day was this small U.S. Treasury announcement headlined, "Treasury to Auction $61 billion in Bills."  As far as we are concerned, the 'devil is in the details' and those details point to a growing problem with enormous negative implications down the road, similar in nature to the demographic implications related to an ever-aging population. The detail which concerns us is the fact that the entire $61 billion in new bills are for the short term, being comprised of $30 billion in 13-week paper and $31 billion in 26-week paper.  We believe there is tremendous danger in concentrating huge portions of government debt to short-term instruments, particularly within the USA but also in debt-ridden nations such as the UK, Greece and Spain. As long as interest rates remain low, and in some cases actually at or near 'zero', the policy appears sound.  Little interest must be paid on these loans and this allows government to carry tremendous amounts of debt and yet face only modest interest charges.  An illustration of the principle can be found in the fact that in 1998, total USA government debt amounted to 'just' $5.526 trillion while at the end of 2009 it has passed through and above the $12 trillion level.  However, the amount of interest being paid this year is almost exactly equal to the amount paid in 1998 when the debt was less than half the current amount. However, we must then ask, "...what will occur if interest rates rise dramatically over the next two years and longer as many experts expect?".  If America's debt was predominantly long-term in nature, then the amount of interest that must be paid on debt instruments cannot increase until those bonds expire, thereby offering a degree of stability. But with so much debt concentrated in the short term, any increase in current rates will immediately transpose itself into increases in government interest payments, putting upward pressure on budgetary deficits.  And, should we ever enter a period such as 1979 to 1981 when short-term rates approached twenty percent, interest on debt alone could consume an amount equal to more than half all current U.S. government expenditures and could easily become utterly unsupportable. That is the risk implied by concentrating debt into the immediate short term and we believe the risk is being utterly ignored by present monetary authorities (see Time Magazine award to Bernanke below).  In our opinion, this increasing level of risk is a plus in our long-term outlook for the monetary precious metals. ................ As year end approaches, one of the more interesting features of the economic landscape is the issuance of economic forecasts for the coming year and the world of precious metals is certainly no exception.  In fact, we will be publishing our own in the last "Melman Minute" of 2009. One such forecast which caught our eye was issued by Jeffrey Nichols, Managing Director of American Precious Metals Advisors.  What struck us as being of particular value was his listing of four essential points which, in his opinion, back up his long term bullish scenario.  These are: - Inflation-fueling monetary and fiscal policies - Central Bank reserve diversification with the official sector being a taker instead of a      supplier of gold in 2009 and the next few years -  Expanding institutional and investor participation in America, China and elsewhere -  Declining world-wide gold production. His forecast for the coming year for gold is $1,500 - or higher. We agree on his major points.  As for his forecast, please wait another few days. ................. One last point is worth noting.  Perhaps our greatest overall concern is the legacy of faith in government interventions which is still rampant among most of the general public.  That faith has been shown in many directions, most notably in the awards handed out to prominent individuals who espouse such 'solutions'.  Earlier this year we saw the Nobel Prize for Economics being awarded to a noted Keynesian, Paul Krugman.  This past week, we have just seen Time Magazine announce their "Man of the Year" selection was yet another pronounced Keynesian, Fed Chairman Ben Bernanke. Given that we believe free markets represent the only sustainable avenue toward genuine, sustainable economic progress, in our judgment, the awarding of such prizes to those selected individuals represents a weakness.  We shall see. Markets this morning have taken a sudden, positive turn for the precious metals.  As of 10:00 AM PST, gold has rebounded from a low of $1,095 back to near $1,115 while silver has advanced from $17.05 to $17.30.  Base metals now show slight gains on balance while both major mining share Indexes are now on the plus side as well.  Crude oil has gained just under $1.00; the U.S. Dollar continues to show short-term strength; and financial markets in the U.S. and Canada are little changed on the session. - - - - - All quotes US$ unless otherwise noted. Next "Melman Minute" scheduled for Monday, December 21, 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.