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!"   January 6, 2010   As we enter the new year of 2010, it is our belief at TMR that the "great question" has now become clear, at least in our eyes.  We believe it is taking the form of whether it will be possible to sustain a solid worldwide economic recovery over time without igniting the fires of inflation - which itself would carry the seeds of the next, and perhaps fatal, economic downturn.  By 'fatal' we mean that important national economies might no longer be able to correct themselves and still maintain present economic and political systems. As matters relate to both precious and base metals, it is our opinion that there are two differing scenarios which could play out.  If the recovery is sustainable over time without re-igniting inflationary fires, then base metals could enjoy substantial strength (such as this morning!) into the future while under that scenario; gold might lose some of its anti-inflationary and anti-crisis attractions.  However, should the fires of inflation develop and particularly if they are then accompanied by rapid rises in interest rates which could cripple economic growth, then the precious metals would appear likely to enter new phases of their ongoing bull markets. We are already receiving several items of information that would seem to indicate that inflation - particularly visible price inflation as opposed to monetary inflation - could be on the rise.  Please note the two following charts: As can be seen, Crude Oil is once again in rally mode, having pushed above $80 and the next higher levels appears to be the $88-100 range of late 2007 - early 2008. The chart on Copper looks even stronger and, in fact, that metal appears ready to challenge all-time highs above $4.00 per pound. A look at fundamental demand information can be quite revealing and, regarding the auto industry in particularly, would appear to affect both commodities.  We are referring to the projected growth in the number of automobiles over the near future, particularly within the giant Asian nations of China and India. General Motors just reported that their sales within China are soaring, gaining by a whopping 67% during the 2009 calendar year, reaching almost two million new cars, this achievement coming in a nation in which private auto ownership was virtually non-existent just a couple of decades ago.  GM China Group's marketing director, Kevin Wale, was quoted by Dow Jones Newswires as stating, "...The industry outlook is strong and we expect more growth..."  Dow Jones also noted, "...China's government gave the auto industry a boost last year by introducing several policies aimed at increasing demand, such as halving the purchase tax for vehicles with small engines."   While that tax break is being rolled back, industry analysts still predict an increase of 15% in car sales year-over-year during 2010.  It is also worth noting that in countries such as the USA and Canada; the majority of all new car sales involve a trade-in, so there has been little increase in the number of vehicles on the roads during recent years.  However, in China that is not the case since during previous decades, there was minimal private car ownership, so their robust new car sales, in general, represent an increase in the number of gas-consuming vehicles on their roads. While there has been some time-delay compared to China, India's auto sales are now taking off in a resounding manner as well.  GM sold 70,000 cars in India last year and expects that figure to leap to near 100,000 this year.  For the nation as a whole, the latest monthly new car sale figure was for November, 2009 and amounted to 133,687 - or an annual rate of 1.6 million - and, as in China, a significant portion of those sales represents additions to the vehicle stock, rather than replacements. This discussion brings us back to the two charts noted earlier.  With auto manufacturing on the rise, combined with increased demand for housing and other manufactured products, this appears to be having a positive impact on copper prices.   It must also be considered that China was also reported to be stockpiling copper as an investment for monetary protection against a possible decline in US$ quotes. It also seems likely that the steadily growing number of new cars in both nations could have a strong impact on Crude Oil prices, providing some protection against any bear market moves within that commodity.  We cannot help but note that the price increases for copper and Crude have come in the face of at least a "mini rally" in the US$, a rally which would normally see commensurate declines in the price of dollar-quoted natural resources. Should these trends continue, it is our belief that they will lead to increasing visible price inflation, then to higher interest rates as investors demand greater protection against future declines in the purchasing power of their fiat currencies.  Many historic examples show us that similar inflation-driven interest rate rises have led to strong rallies in the precious metals. And, as if taking note, the yellow metal has indeed rallied sharply during the earliest part of 2010, gaining almost forty dollars during the first three sessions and, as of this morning, the price for gold is now approaching the $1,140 level - a full $65 above the recent lows near $1,075. One other item will receive our close attention during the coming year and that is the rapid escalation of government regulation of previously free markets.  The trend is unmistakable and involves not only America, but also many other industrialized nations on this planet. During the past few weeks, we have seen articles indicating new regulations for the entire spectrum of medical services delivery; tougher U.S. drilling rules for the petroleum industry; additional regulations from the IRS requiring licensing of anyone setting up a tax preparation assistance service; a host of new climate control regulations and laws; etc.  In his testimony to Congress, Fed Chairman Bernanke openly stated that the financial crisis could be blamed on "faulty regulations" and he would be working to correct this problem, not only in America, but in other nations as well.  As noted in the Globe and Mail's "Report on Business" section, "...U.S. Federal Reserve Chairman Ben Bernanke is calling on the world's policy makers to use regulations to pierce developing asset bubbles..." We have two thoughts on the matters.  First, along with many other analysts, we believe it is government policies which have led to asset bubbles and, therefore, it is governments which should be regulated - not the other way around.  Second, over-regulation tends to diminish economic efficiency, which could easily exacerbate - not resolve - future economic difficulties. We will watch this topic with much interest during the coming twelve months and beyond. Markets this morning show Crude and Copper continuing their rallies with Crude now near $83 per barrel and copper just above $3.50 as of 9:45 AM PST.  Gold is up nearly $20 to just under $1,140 while silver is also moving strongly higher, ahead by 40 cents to $18.20 per ounce.  In addition to copper, all other base metals are rising sharply as well and, not surprisingly, major mining share indexes have also posted healthy gains on the order of three percent.  Financial markets are moving in opposite directions with Canada's TSX up by about 40 points while the Dow Industrials have posted small losses.  Interest rates are generally headed higher so far. - - - - - All quotes US$ unless otherwise noted. Next Melman Minute scheduled for Friday, January 8, 2010. ◄  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.