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 19, 2010 Perhaps the best measure of a boxer's staying power is how well he can take a "Sunday Punch" and still come back fighting.  In terms of gold, two such 'punches' were unleashed over the past two trading days and, as it turned out, gold's staying power has been tested and not found wanting. Following gold's spectacular rally overnight Monday through Tuesday morning - clearly evident on this five-day chart of gold's Exchange Traded Fund (symbol: GLD) - the International Monetary Fund suddenly declared they were going to sell 191 tonnes - or just under 5,000,000 ounces - of gold.  The yellow metal plunged overnight, but by the time trading resumed Wednesday morning, gold had stabilized and traded quietly the rest of that day and into Thursday morning.  Then, just near the close Thursday, the Federal Reserve suddenly announced they were raising the Discount Rate to banks from 0.50% to 0.75%.  While the Discount Rate does not specifically reflect general credit demand and is little used compared to say, the Fed Funds Rate, the markets took this adjustment as a signal that the period of "loose money" may indeed be coming to an end.  Should that be the case, the next assumption was rising rates might slow down economic activity and diminish inflationary fires, and the ensuing market reaction was for gold to fall sharply late Thursday and into early trading this morning. However, just as in the case of the IMF announcement, that decline was short-lived and by 9:00 AM PST this morning, gold had recovered those losses and appeared en route to gains for the day. ................ One of President Obama's pet projects is likely to go forward with the announcement that his bipartisan commission to reduce deficits was in the process of formation.  However, we believe that the odds regarding any successful outcome for this commission are low indeed.  In the first case, there will be twelve Democrats versus only six Republicans on the commission.  While this does give the Republicans veto power since it will take fourteen votes to make any substantial recommendations, the bias of the actual debates would appear to favor those who historically have been averse to genuine spending reductions. There is also a political reality involved.  According to John D. McKinnon, writing in the Wall Street Journal, the Democrats are unlikely to approve any meaningful spending reductions unless the Republicans endorse increases in taxation, something they have strongly opposed.  Even President Obama seemed to be downplaying the potential of this commission (which makes us wonder why it is moving forward in the first place) and among his comments he noted that the Commission was, "...taking on the impossible...As important as this Commission is, our fiscal challenge is too great to be solved with any one step alone." We also have another concern and that is the mandate of the commission.  As McKinnon notes, "The executive order actually lays out two separate goals.  One is to trim short-term deficits by 2015..."  Frankly, with that watered down initial objective, we conclude that the commission is simply a public-relations ploy to make it appears that something is important being done while everyone is really aware that nothing of significance is likely to take place.  (Our emphasis) Relating to gold and silver, we consider this as yet additional evidence that huge deficits will be forthcoming for at least the next three or four years, meaning debt and dollar value destruction will likely continue apace for some time. There is yet another dark cloud on the horizon when it comes to the inflationary battle. Just like gold, the price of Crude Oil refuses to break to the downside in any substantial manner.  Just when it appears the price might collapse, renewed strength enters the market, as it has done during the past week with the latest run from just under $70 per barrel to about $80.  What makes this run even more remarkable is the fact that it is taking place during a period of relative U.S. Dollar strength.  Of even greater importance to us, highly-regarded experts are now stating boldly that higher prices are in the works later this year and into the future - and few fundamental pieces of information can instill future inflationary fears as vividly as rising petroleum prices. According to a story this morning in the "U.K. Telegraph", experts from both Bank of America and Barclays Capital (BarCap) are now solidly in the bullish camp for petroleum prices.  As their article notes, "Bank of America and Barclays Capital , two leading oil traders, have told clients to brace for crude above $100 by next year before it pushes relentlessly higher over the decade."  Amrita San, oil expert at BarCap, added, "Oil has the potential to flirt with $100 this year.  We forecast an average price of $137 by 2015." Why do these experts offer such forecasts?  Two reasons in particular are cited.  In the first case, "Global spare capacity is likely to be reduced to low levels within a relatively short time...The global economic crisis has postponed, but not cancelled, a crunch.."  In the second case, "Approximately 1.7 billion consumers in emerging markets with a per capital income of $5,000 to $20,000 are eagerly waiting to buy cars, air-conditioning units, or white goods." We believe McKinnon's final comment is worthy of deep consideration.  It reads, "The oil spike brought the global economy to a shuddering halt in 2008.  This time the crunch may hit before the West has fully recovered.  Whatever happens, the U.S., Europe and Japan will soon transfer a chunk of their wealth to the petro-powers.  It is a new world order."  (Our emphasis) With worldwide economies still in a state of disarray, with currency destruction still ongoing and with rapidly aging populations adding to an already-ominous long-term outlook, this is yet another potential landmine for the industrialized world to deal with.  We expect gold and silver will continue to be effective "thermometers" regarding such efforts. Financial markets this morning show surprisingly little reaction to yesterday's Fed move.  As of 9:30 AM, both the Dow Industrials and the TSX Index have reversed earlier losses and are presently ahead by about 35 points each.  Gold continues to rally and stands at spot $1,123; a gain of over $20 from the morning's lowest levels while silver is also stronger, up by about 40 cents on the session.  Base metals are sharply higher across the board with copper and nickel showing particular strength while mining share indexes have also moved to the plus side.  Crude oil is trading just under $80 per barrel and in currency trading, the U.S. Dollar is holding on to early gains. - - - - - All quotes US$ unless otherwise noted. Our next Melman Minute will not appear until Monday, March 8 when we will be writing from PDAC 2010 in Toronto.  The pressures of completing our forthcoming book, "Reversing the Way In" as well as preparing our Financial Conference presentation entitled "A Message From the Queen" on March 7 leaves us with a severely cramped schedule, to put things mildly.                   ◄  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.