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. Since the work has been expanded to include potential solutions to the growing list of seemingly insoluble dilemmas, the working title of the book has been revised to 'REVERSING THE WAY IN!"   January 29, 2010 We suppose it cannot come as much of a surprise when a strong advocate of free markets, 'hard money' and limited government, such as this website's editor, criticizes President Obama's recent State of the Union Address as being somewhat unrealistic, to say the least.  However, it does come as a distinct surprise indeed when a major publication which has been one of the President's strongest supporters comes out with a story of a similar nature.  This morning's article was published in the left-leaning New York Times and referred to a pledge made in the President's speech:  "So tonight we set a new goal:  We will double our exports over the next five years..." Here is the article's comment on that pledge.  "Since the Obama Administration has not yet clearly articulated a trade policy or even sent several completed trade agreements to Congress, his pledge to double exports in five years was greeted with incredulity, even among Democratic trade policy experts."  The Times then quoted Leslie H. Gelb, president emeritus of the Council on Foreign Relations, as asking, "...How will he perform this miracle?  It really is a mystery." When his own supporters begin to ask such questions, it is apparent that the President's troubles are far from over - and we would then suggest that the coming Congressional elections of November 2010 could produce some unexpected, perhaps startling, results. Actually, the President received some good economic news this morning when the Department of Commerce issued their preliminary Fourth Quarter 2009 GDP growth estimate with that figure coming in at a very high rate of 5.7%, the fastest pace in six years.  Analysts at the Bureau of Economic Analysis suggested that fully two-thirds of that improvement came in the form of inventory adjustments which might not last for any prolonged period.  Markets reacted strongly at first, but by 9:40 AM, most financial indexes had returned to about unchanged for the session. While it is true the DX Index for the U.S. Dollar has been on the rise lately and now stands above 79, perhaps the real reason is that its main fiat currency competitor, the EURO, has been buffeted by strong news of a most unfavorable nature, and the stability of that "other" fiat currency is now being placed in some real doubt. One of the new acronyms we see bandied about of late is "PIGS" or its variant, "PIIGS".  In each case, they refer to several European nations that are facing dire financial difficulties.  The former refers to "Portugal, Italy, Greece and Spain" while the latter is formed when you add Ireland into the acronym.  A particularly severe example is Greece, which is being buffeted by troubling economic and social cross-currents.  On the one hand, the Greek population has become accustomed to generous government benefits in a number of directions, benefits they are adamantly determined should not be reduced.  Unfortunately, the Greek economy, mainly focused on tourism and the retail trade, cannot generate sufficient funds to cover such expenditures and rising deficits are the order of the day.  However, as part of the European Union, they signed agreements defining the limits of such deficits and Greece is now far in excess of those limits, meaning they may face expulsion from the Union and, thereby, the use of the Eurocurrency.  Should that occur, Greece would be forced to re-introduce the Drachma and no one can even guess that unit's possible value.    In order to forestall such a calamity, Greece has been financing their deficits by home banks borrowing overseas.  Tim Congdon of International Monetary Research explained the danger inherent in such actions to the "U.K. Telegraph" in this way:  "...the danger is that wealthy Greeks may shift money to bank accounts abroad if they lose confidence.  This would set off a banking crisis and become self-fulfilling.  Greece has been financing current account deficits through its banks, which have built up E110 Billion foreign liabilities.  If foreign creditors want their money back, defaults and/or macroeconomic catastrophe appear inevitable."  (Our emphasis) What is even more remarkable is that Greece may not be the worst problem among the troubled five nations.  Moody's rating organization has just issued an alert regarding Portugal's debt, saying it needs to offer a credible plan to reduce structural deficits rather than "one-off measures" and Spain is in horrendous shape, where the article tells us, "...youth unemployment has reached 44 percent and the housing bust has a long way to run."  (Our emphasis) No one so far has been willing to offer any bailout to these troubled countries and that fact appears to be reflected in the Euro's depressing-looking chart. Normally one would expect gold to be rising on such news, but instead it continues on its latest decline.  The great question is whether this is the beginning of a new bear market in gold or is rather a correction within a long-term bull market.  We subscribe to the latter thesis and one of our reasons is technical in nature.  Nothing is more normal than periodic important corrections within bull trends, and charting texts tell us that those corrections can take the shape of an "a-b-c" decline where "a" represents the initial fall, "b" a smaller counter-rally and "c" the final decline, often of a similar magnitude to the preceding "a" move.  Those texts also tell us that corrections frequently represent a 'pull-back" to the point of an important breakout. If the two suggestions turn out to be correct, on the gold ETF chart we have an initial decline ("a") starting in early December from about 120 to 107; a recovery ("b") to 113 and a second decline ("c") which is now underway and which, according to theory, should end near the 100 level - or about $1,020 spot gold.  It is also worth noting that the major upside breakout on this two year chart occurred when gold rose above prior peaks in the 990 to 1030 zone for spot gold. Therefore, we would suggest that zone is an important area for our studies and a decisive break below 990 would be a matter of no small concern.  On the other hand, a decline to the zone, followed by some base-building, and then an upside breakout from that base could serve to support a renewed rallying move of some magnitude. As of 10:45 AM PST, gold is down about four dollars to near $1,080 while silver is holding steady near $16.25.  Platinum, palladium and the base metals have a slight downward bias on average and both major mining share indexes continue to show weakness.  The US Dollar has strengthened somewhat, crude oil is trading quietly just above $73 per barrel and financial markets in North America are split with the Dow Industrials up by about 50 points while Canada's TSX is down by a similar amount. - - - - - All Quotes US Dollars unless otherwise noted. Next Melman Minute scheduled for Monday, February 1, 2010.  At that time we plan to take a look at information which might be gleaned from the famous "January Indicator." ◄  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.