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!"   February 10, 2010 Normally, our analysis of action in the metals markets takes two forms.   In the first case, we watch for fundamental information which might impact the supply/demand equation for base metals and those precious metals which also have an industrial component such as silver and platinum.  In the other case, particularly for gold but also silver and platinum, we are much more concerned with economic and social trends. For the time being, there appears to be little power driving the base and industrialized metals, other than periodic excitement relating to items such as lithium, rare earth minerals, uranium or potash.  There appears to be a strange balance between rising demand in China and India offset by relative quietude in America and actual stagnation in Europe.  As a result, we seem to find little in the way of accelerating force in our fundamental analysis relating to those metals and minerals. However, the condition is far different for the precious metals as we note five different trends, two short term and three longer term, which we believe will raise serious questions regarding both economic and social stability in the intermediate to long term. The first short term trend relates to the old saying, "Be careful what you wish for, you just may get it."  In this case, we are referring to the stirrings of at least short term economic recovery.  As we have noted previously, recovery carries with it the enhanced risk of increasing credit demands which could re-ignite factors which could inflame visible price inflation.  One of those potential factors was in the headlines today when the U.S. Commerce Department reported the Balance of Trade deficit took a strong move upward in December, reaching $40.18 billion, or a rate now approaching one-half trillion dollars per year, far above last year's annual total of 'only' $380.66 billion. It is our belief that the rising trade deficit will accelerate the accumulation of U.S. Greenbacks in foreign hands, further weakening the underlying support structure of the US currency. In the second short term case, we are reminded of a different saying, namely, "Nothing is confirmed until it is officially denied."  For weeks on end, Germany and other important European nations stood in line to state positively that there would be no rescue programs for Greece and the other PIIGS nations which are under financial duress.  However, this past Monday afternoon, just as financial markets were falling rapidly and threatening to descend into the depths of panic selling, Germany "suddenly" announced that they would indeed contemplate a rescue program after all. From our point of view, all this demonstrates is a lack of willpower on the part of the European Economic Union as well as a frightening lack of any solid monetary principles governing the world's second most important currency, the Euro. While these two factors are garnering their share of recent headlines, we believe there are three longer-term forces which continue to build just below the surface, but which could have a powerful collective impact on public psychology and, therefore, the potential prices for gold, silver and platinum. #1 - The world's economies seem to be caught between a 'rock and a hard place'.  If prosperity is not quickly restored, the potential exists for a depressionary, deflationary collapse.  Unemployment is high, deficits are enormous and debts at all levels are at critical areas where debtors - both government and private - are in danger of defaulting. However, if prosperity is restored, we may very well find that the increasing demand for credit and the more rapid 'turnover' of money within a rising economy could easily fuel growing visible price inflation which, in turn, would force interest rates higher and thereby abort any nascent recovery. #2 - In our opinion, we are witnessing a general diminishment of confidence among the public in the ability of the political establishment to truly resolve societal problems.  We believe that the public wants to believe such solutions are possible but the failure of the Obama Administration's first year in office to mount a believable, consistent program which is producing actual strong results is having its negative effects on public confidence.  The recent "Tea Party" syndrome is one reaction and another is the pattern of reversals encountered by the Democrats in state elections in Virginia and New Jersey and the just-concluded Senatorial election in Massachusetts, with negative results for Obama and the Democrats in each case. We also believe that the ongoing fiasco as Europe vacillates back and forth from austerity to permissiveness without putting forth a believably cohesive program is also serving to undermine confidence in government solutions. Unfortunately, we do not seem to be witnessing a corresponding rise in free market enthusiasm, just a growing uneasiness that today's problems may indeed be insoluble. #3 - Suddenly, public awareness regarding the disruptive threat of international terrorism as well as the potential for nuclear war is increasing.  During December we saw the almost total disruption of American and Canadian air travel due to the "underwear bomb" incident on board an international flight scheduled to land in Detroit.  Suddenly enhanced airport security measures quickly resulted in huge delays, missed flights and growing unease regarding this threat to our normal way of life. Most recently, it seems likely that the nation of Iran is willing to endure the scorn and hostility of the international community as it continues its drive to acquire weapons-grade enriched uranium.  Iran has just told the world that it is going ahead with enrichment plans, period. It cannot be forgotten that Iran is a major player in the world's petroleum market for two reasons.  First, it is an important producer of crude oil itself.  Second, it hold the threat of its geographic position astride the "Straits of Hormuz" at the head of the Persian Gulf through which much of the world's petroleum passes.  This position of importance to international petroleum supplies is their "ace in the hole" should the world threaten reprisals for their enrichment activities.  And, of course, Israel, knowing they are likely to be the first nation at risk of nuclear attack should Iran ever succeed in the manufacture of nuclear weapons, has stated clearly that they would attack Iran's bomb-making capacity should that day approach. All of these underlying situations appear to be gradually increasing, which is why we continue to recommend insurance holdings in precious metals as well as maintaining a long-term bullish bias for gold, silver and platinum. Financial markets in Canada and the USA fell in early trading but as of 9:40 AM PST both the Dow Industrials and the TSX Index had recovered those early losses.  Precious metals also declined early in the session, but have been regaining lost ground as well with gold recovering to near $1,075 from a morning low of $1,061 and silver similarly up from about $15.05 to near $15.30.  Base metals are little changed on balance as is also true of mining share indexes while the US Dollar Index is recovering some of yesterday's lost ground.  Crude oil is trading quietly near $73.00 per barrel. Trading in the TYX Index (which measures long-term 30-year US government bonds) appears to be trapped inside a narrow range between 4.5 and 4.6%, having made several moves within those narrow boundaries.  We are watching closely for a breakout from this range. - - - - - All quotes US$ unless otherwise noted. Next Melman Minute scheduled for Friday, February 12, 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.