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!"   MELMAN MINUTE - April 28, 2010 - - - - - These past few days have been full of monetary turmoil, and that is an understatement.  But what really impresses us is the reaction of gold to the entire situation. As the saying goes, the (expletive deleted) really hit the fan yesterday when Standard & Poor's bond rating organization downgraded Greek debt to BB+ from BBB+, thereby moving it into the category of "junk" in international bond trading.  Compounding this downgrade was another similar move by S&P regarding the debt of Portugal, in their case lowering Portugal's debt rating from A+ to A-, placing them near the lowest possible category while still retaining some semblance of "investment grade" status. The markets' reactions were swift, and perhaps predictable.  Because of this enhanced level of risk, interest rate on Greek debt soared, reaching above 20% for short term debt and near 10% on ten-year paper - both ruinously high for a nation already staggering under huge debts and deficits.  Quotes on Portugal's debt also plunged, raising their effective rates, and the difference between German two-year rates and Portugal's expanded to 4.3% from 'just' 3.1% the day before. An item of even greater concern is now receiving attention.  In the scheme of European financial matters, Greece and Portugal are relatively small players.  However, that is not the case with Spain, a nation of 42 million people and the 4th largest European economy behind Germany, France and the U.K - and the indications for the Spanish economic outlook continue to look ever more grim.  For example, they are running horrendous governmental budgetary deficits, fully comparable to both Greece and Portugal as the latest numbers show 13.6% for Greece, 11.2% for Spain and 9.45 for Portugal. Ironically, the European Economic Community's 'legal limit' for deficits from any nation is set at 3%, but that figure has been completely ignored of late.  As dark clouds threaten the stability of the entire Eurocurrency, quotes on the Euro have begun a renewed plunge, taking the quoted figure versus the U.S. Dollar to the lowest levels of the year (see chart), and that raises the specter of rising inflation as the price of all items posted in US dollars will undoubtedly rise as the Euro falls.  Higher inflation would likely mean higher interest rates for all member nations, thereby putting even more pressure on budgetary deficits while slowing economic activity. Several important trading moves then ensued.  As fears of European stability began to deepen, there was a natural reaction among traders to get out of European debt offerings and into Dollar-denominated ones, and the US Dollar subsequently soared, with the DX Index rising to its highest levels of the year (see chart). Next, as the Greenback strengthened, quotes on raw materials priced in that currency began to decline sharply, including base metals, petroleum and even some precious metals, since it would now take fewer US Dollars to purchase a given quantity of those items.  At the same time, reacting to what appeared to be a worsening monetary crisis, financial markets around the world declined sharply, with the Dow Industrials falling yesterday  by more than 200 points.  However, something quite unique then occurred, and is still taking place during today's much quieter markets.  GOLD RALLIED STRONGLY!   For several years, gold and the US Dollar have been moving in virtually opposite directions, so yesterday and today's trading represents something quite unusual with the Greenback and gold both gaining simultaneously.  Our interpretation is this:  many people believe the current threats to the stability of the world's international currency stability are extraordinary and, therefore, some quantities of paper wealth are now seeking the safety of gold at the same time other money is seeking the presumed safety of the US currency. We believe one of the reasons for this belief in a growing threat to currency stability, simply stated, is that the 'solutions' being proposed to resolve the crisis have been, in our opinion, nothing but hot air without any specific, believable bases.  One such 'empty' comment was offered in today's Wall Street Journal when several financial writers blamed the crisis on a failure of European authorities to act decisively when they wrote, "Europe's failure to 'act decisively' has led investors to sell off Greek debt, making it far more expensive for the country to borrow money, and prompting further downgrades.  The worry now is this process will be repeated in Portugal." Fine and good, but what the writers - and a host of other analysts - fail to suggest is what believable, 'decisive acts' should be taken to resolve the crisis while maintaining fiscal stability.  Germany is supposed to bail out Greece, but Germany is already heavily in debt itself and their public polls suggest such a measure would be extremely unpopular, to put things mildly.  The European Economic Community might bail out Greece, but with what?  Their charters do not allow for the artificial printing of additional paper monies, while, as Brian Blackstone writes from Germany, "The European Central Bank (ECB) is struggling to limit the fallout from Greece's debt crisis on European financial institutions as it confronts a fresh problem closer to home:  its own balance sheet."  (Our emphasis)  It turns out that all-important bank now counts Greek debt among its assets, but since Greek debt is rapidly falling in value, the ECB itself is now in danger of falling below their own legal capital reserve requirements. Not surprisingly, many other banks which hold Greek debt paper as a bank asset are similarly in danger of failure and the specter of a simultaneous collapse of several Central Banks in European nations is now becoming more possible - and the fallout from such an event, should it occur, could be catastrophic.  And so, for public relations purposes, the ECB refuses to countenance the possibility of such an event.  In fact, ECB President Jean-Claude Trichet was quoted on Tuesday as declaring, "...a Greek default is out of the question." Those are fancy words, but they have not been backed up so far by a believable plan of action.  And so, the crisis continues to play out in front of the world's financial community - and gold continues to move sharply higher, as is clearly evident from the gold ETF chart.  Markets have quieted down for the most part this morning and as of 10:00 AM PDT, the Dow Industrials have regained about 50 points while Canada's TSX is slightly lower.  Gold is on the rise, having pushed above $1,175 for the first time since last December but silver, platinum and palladium are all trading lower.  Base metals markets have stabilized following yesterday's losses, mining share indexes are very strong this morning, crude oil is slightly higher and currency markets are relatively quiet in the aftermath of yesterday's upheavals. - - - - - All quotes US$ unless otherwise noted. Next "Melman Minute" scheduled for Friday, April 30, 2010.  Just as today's entry was being completed, word came that S&P just downgraded Spain's debt as well.  We will take a look at some of these new implications Friday.            ◄  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.