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 11, 2010   The anti-inflationary argument is getting more difficult to justify with each passing week.  Not only have we seen steadily rising prices in the entire petroleum complex and base metals such as copper, but we are now seeing increasing demands coming out of China at some of the highest levels in history for end-products such as finished steel An article authored by Robert Guy Matthews described the Chinese market for steel in the most positive terms, noting, "China's surging demand for steel this year is expected to dominate the landscape of the steel industry as never before...While other economies are strengthening, they don't offer the same potential for growth as China."  Regarding the outlook for the indefinite future, Mathews quotes Philip M. Fish, economist for MEPS International, "...Chinese steel production and demand is likely to continue its inexorable rise." Increasing production in steel has an enormous influence on other mining ventures.  Steel production obviously requires iron ore, so areas such as Australia, Minnesota and parts of Quebec could benefit.  An important alloy in steel manufacturing is molybdenum, so various existing productive operations as well as several exploration/development projects could receive a boost.  Producing finished steel requires coking coal which should benefit many mining operations, particularly including those in Western Canada which are geared to export supplies into the Chinese marketplace. It is also important to note that increasing demand, when the rate of increase in that demand exceeds the growth of available supply, normally pushes prices higher and that is what has been happening in the steel industry.  Mathews notes, "Iron-ore prices, at about $110 per tonne, have been climbing toward their highest levels in more than a year.  Coal prices for steel mills and electricity production have surged by more than 80 percent..." Another factor is that increasing mining production in one segment can lead to supply shortages in others and we also learn that, "...cooper, aluminum and zinc prices also have risen." We believe that this report on the Chinese steel industry is simply another indication of higher future materials prices, a trend which appears likely to continue as long as the world's economies rebound from their depressed levels of 2008-early 2009. But there is another factor in the total equation which we consider of even more importance to the long run total inflation picture, and therefore potentially positive in its impact on the precious metals.  We are referring to the takeover of American government economic policy by those who advocate expansionist policies. Among the most important advocate of such measures is the most recent recipient of the Nobel Prize for Economics, Professor Paul Krugman.  Dan Richards, Professor in the MBA program at the Rotman School of the University of Toronto recently concluded an in-depth interview of Krugman and just published his report in the publication, "Report on Business" for the Toronto Globe & Mail.  Since Krugman now occupies a position of major influence in American economic policy through his widely-read column in the New York Times, we studied Professor Richards' report on Krugman's comments with deep interest. Here is what this most recent Nobelist had to say on various topics: On STIMULUS PLANS - "If I could do it, I would have another package as big as the first one...To say that we should double it to $1.4 trillion, total, is perfectly reasonable." On U.S. TAX RATES - "Advanced countries can collect a lot of taxes...It's very difficult to see how we can manage in the long run without adding several percent of tax revenue...There is a very good case, at very high incomes, to have a tax rate in excess of 50%...I would be willing to go north of 50%, but I don't know how high." On DEFICIT FEARS -"We are looking probably at consolidating debt at all levels of government of 80 percent of GDP or 90% of GDP 10 years from now...We've seen examples of advanced countries, even ones with somewhat wobbly governments, going to debt levels that high and higher without trouble...The point is, basically, that that the debt level as an argument against fiscal stimulus just doesn't work." On FREE MARKETS - "The theory of the case has been that eventually private market forces would come along and generate the recovery and they could withdraw the stimulus.  That is not happening.  You need something more aggressive." To someone such as myself, who developed his economic knowledge and ideas by studying works such as Ludwig Von Mises' "Human Action" and Murray Rothbard's "Man, Economy and State", many of these ideas not only do not make sense, but they appear to be leading the world's economies into a state of rising peril.  One particular quote of Rothbard from his "Man, Economy and State" comes to mind which illustrates the difference between him (and other hard-money, free-marketers) and high-tax advocates such as Krugman: "Taxation, as we have seen, takes fro producers and gives to others.  Any increase in taxation swells the resources, the incomes, and usually the numbers of those living off the producers, while diminishing the production base from which these others are withdrawing their sustenance.  Clearly, this is eventually a self-defeating process:  there is a limit beyond which the top-heavy burden can no longer be carried by the diminishing stock of producers." There is a great struggle ongoing between these two styles of economic philosophies and, in our opinion, it is a great misfortune that the side of Krugman and Lord John Maynard Keynes appears to be winning.  We believe that their course is fraught with dangers - and we believe the steady rise in gold during the past decade from barely $250 to the present high levels is a reflection of a growing sense of recognition amongst the public of this point of view. Market this morning would appear to support this concept as the precious metals have been rallying strongly.  As of 9:00 AM PST, gold is now approaching the $1,160 level, silver is up by 25 cents to just under $19.00 per ounce and platinum looks like it is ready to close in on the $1,600 per ounce figure.  Base metals are also higher on balance but surprisingly, and a matter of some concern, mining share indexes are lagging behind levels they might have been expected to surpass, given gold's strong moves to peaks well in excess of those attained in early 2008. In other areas, financial markets in Canada and the USA are close to unchanged, crude oil is trading near $83.00 per barrel and the U.S. Dollar is showing renewed weakness on foreign exchange markets. - - - - - All quotes in US$ unless otherwise noted. We plan to discuss the relationship between mining share indexes and the prices of the metals themselves in our next "Melman Minute", now re-scheduled for this coming Thursday due to a quick business trip to the USA. ◄  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.