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!"   April 5, 2010 Our first order of business is a note of apology.  We had planned to publish a "Melman Minute" this past Friday, but were prevented from doing so by one of the most powerful windstorms to hit Vancouver Island in quite a while.  Many boats in marinas were destroyed; trees overturned by the hundreds; and power was lost to more than 100,000 Islanders - ourselves included.  Hopefully, we are near the end of the stormy season and will not have to face this problem again until late October or November. .................... One look at the two-year price chart for Crude Oil tells us that something significant is taking place.  After trading in a narrow range between $77 and $83 for six months, crude oil is once again on the rise, moving up to above $86 per barrel earlier this morning while the futures price of its trading companion, unleaded gasoline, rose to $2.36 per gallon, the highest level since September 2008..  Few important economic subjects have elicited such diverse opinions as the projected price for crude oil and during the past few months we have seen contradictory predictions from renowned experts, some of them calling for a plunge back to $40 -50 per barrel while others are calling for a massive and perhaps even explosive move higher.  In addition, a third group claims that the present price is "about right", representing a true balance between anticipated supply and projected demand. The situation was clouded further this past week when President Obama announced that new areas under American coastal waters would be opened up for petroleum development.  Part of his statement dealt with the concept that it was time for America to use all possible haste in developing its own resources in order to lessen dependence on volatile foreign supplies.  Quite naturally, the petroleum industry in general supported his new stand while the environmental community expressed the view that his plan was a potential assault on the ecology of those coastal areas. One subject leading to the wide variance in price projections has been the quality and quantity of petroleum reserves claimed to remain underground.  OPEC and others have consistently claimed that total known reserves are in the range of 1.150 to 1.350 trillion barrels and this is sufficient to contribute ample supplies until new reserves and growing alternative sources of energy come on-stream.  At the other side of the debate are advocates of the theory known as "peak oil" who claim that we are approaching a near time when production, transportation, distribution and refining of petroleum will no longer be able to keep up with demand. According to a recent Oxford University study, known reserves are, in fact, closer to 850 to 900 billion barrels or about 30% below prior estimates.  The leader of the study, Sir David King, openly warned of price spikes and actual excess of demand versus supply by as early as 2014.  The Oxford study also questions two of the primary assumptions being made by those who are reassuring the public that supplies will remain ample for some time to come.  In the first place, development of the Canadian tar sands many not be economic going forward due to rising production costs combined with the expensive and time-consuming hostility of the environmental community.  In the second case, they believe that reliance upon renewable energy sources may be a false hope.  A UK Telegraph article quoted the report as noting, "...The belief that alternative fuels such as biofuels could mitigate oil supply shortages and eventually replace fossil fuels is a pie in the sky." We cannot help but express concern ourselves that enormous increases in crude demands coming from both India and China will soon be altering the recent balance in favor of demand, already standing near 86 million barrels per day, thereby putting upward pressure on prices - and recent chart action in Crude would appear to confirm that concern.  We would also note that the latest price run from the upper $60s to the present $86 occurred during a period of relative US Dollar strength (see DX Index chart) when it should take fewer dollars to purchase a given commodity, rather than more. There is one additional concept well worth noting.  Rising petroleum prices have historically been one of the primary factors in visible price inflation, and, should the price bulls be correct, fears of rampant inflation could be on the rise.  As we have noted, rising inflation will almost certainly result in rising interest rates and our TYX Index which measures the interest rates on 30-year US government bonds has just broken out to 4.833%, the highest level in many months. Oil remains a vitally important component of the international economic picture and this latest price move is suggesting that the future could indeed hold some unpleasant price surprises for consumers - and governments - around the world.  The great fear is that higher petroleum prices could lead to rising visible price inflation which would then act to drive interest rates higher, thereby producing two hugely negative impacts.  First, the economic recovery could grind to a halt and quickly reverse itself and, second, the cost of financing government debt could skyrocket, putting untenable pressures on public financial structures. .................... Speaking of government debt, an article of note appeared in this morning's San Francisco Chronicle.  However, it was not the content of the article that was most important to us, but that it was published in the "Chronicle", one of Barak Obama's most ardent supporting publications.  The article, written by Carolyn Lochhead, was headlined "National debt seems headed for crisis level" and the lead paragraph is a stunner, reading "Health care may have been the last big bang of the Obama presidency.  With ferocious speed, the financial crisis, recession and efforts to combat that recession have swung the U.S. debt from worrisome to ruinous, promising to handcuff the administration."  She went on to point out that according to the Congressional Budget Office, America's governmental debt will exceed 90% of GDP later this decade, and that level "...usually touches off a crisis." When your former strong allies begin to issue warnings about your administration's performance and prospects, it is time to sit up and take note.  That is precisely what we are doing. Markets this morning have made several important moves and, as of 9:10 AM PDT, the petroleum complex continues to show gains with Crude at $86.60 per barrel and Unleaded Gasoline trading between $2.35 and $2.36 per gallon.  Metals markets are higher with gold up $4 to $1,130, silver once again above $18.00 per ounce and both platinum and palladium showing excellent relative strength, rising to near $1,700 and $504 per ounce respectively.  Base metals are mostly higher with nickel making the best move, rising from under $8.00 per pound in mid-February to over $11.30 per pound this morning.  Mining share indexes are ahead by about one percent, financial markets are modestly stronger and the C$ is now approaching par with the Greenback. - - - - - All quotes US$ unless otherwise noted. Next Melman Minute scheduled for Wednesday, April 7, 2010 NOTE:  Mr. Melman will be presenting a workshop entitled "The Greatest Gamble of All" as well as participating in a panel discussion at the upcoming Cambridge House Conference to be held in Calgary April 10-11.  All readers are invited to attend and this particular conference holds particular attraction because it allows for much greater interplay between presenters and attendees because of its more moderate size.  For conference details, please access www.cambridgehouse.ca. ◄  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.