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 - May 6, 2010 - - - - - What a world we live in at this time!  During the three days I ventured into the interior of Mexico (an amazing experience in itself), the world seemed to be moving on a path to relentlessly increase uncertainty and risk on several levels. For those who have not had the pleasure of a personal visit, I can state with certainty that Mexico is a vital and fascinating country, as well as one which holds great potential for mining.  However, it is now becoming a somewhat troubled country as well due to the massive wealth, power and violent actions associated with the drug cartels.  The fight against the cartels has, unfortunately, also created its own levels of violence and corruption associated with politicians and police who, while most are fighting vigorously against the cartels, there are also those who are attempting - and succeeding - to profit from both the drug trade itself as well as the fight against it. The violence and killings associated with this trade are placing a cloud above Mexico's image, both internationally and domestically, and I was particularly interested to gain an impression of the true situation as it exists in both the industrial centers and the rural areas where most mining operations tend to be located.  What I observed was a nation still functioning exceedingly well, which was only minimally touched by the violence which seems to be concentrated almost entirely among those associated with the drug trade and the police fighting against them.  For the average citizen, my impression was that their lives were little touched and for the mining operation that I visited, simple, straightforward security precautions appeared to be more than adequate to deal with the situation.  At no time in the Torreon area from Monday evening thru Wednesday morning did I feel the least bit personally threatened in any way. That does not mean there could be no future risks associated with the violence, should it continue to grow.  It means only, in my opinion, that matters should be viewed in context with the actual situation as it exists, not as the sensation-seeking media would have the world believe. ................. For the rest of the world, things appear to be going from bad to worse, particularly in relation to the now-perilous situation involving the European Economic Community and its currency, the Euro.  As can be seen from its chart, the Euro has been plunging of late and this morning has dropped below $1.28 US, far below its highest levels of the past year or two.  The rate of decline for the Euro appears to be accelerating as the situation involving Greece and other economically weak nations continues to deteriorate.  In fact, there is a stark similarity to what is now evolving in Europe to what took place in America between mid-2008 and early 2009. In each case, dramatic government announcements about how the difficult situation was being resolved caused quick rallies to take place, but these were normally followed by additional heavy financial market selling.  In the American case, the Dow Industrials fell from a high near 14,200 to a low of 6,400 before some stability finally emerged.  In the Euro's case, we are seeing a similar pattern of promising news followed by negative market action. The core of the problem is that no solution has been proposed which is both economically and politically sound.  The latest example reflects the power of the Greek civil service unions who, upon hearing world financial authorities declare that Greece must cut back their civil service staffing and freeze or even reduce salaries for years to come, took to the streets in violent rioting, accompanied by a national civil service strike.  This morning, the situation grew even more ominous as the civil service strike degenerated into a national general strike, threatening to paralyze the country and three people have now died in the violence.  There is also the additional danger that the kind of austerity measures being demanded by the International Monetary Fund (IMF) could reduce business activity in Greece to the point that government would still be unable to cover their debt obligations. Several new stories impacted our world of mining.  In one negative development, the Australian government joined in the move toward higher resource taxation by announcing a plan to increase levies to a "more competitive international level".  Australian mining leaders immediately protested, saying that threats of higher tax levels would put more than A$100 billion of potential resource expendeitures at risk of withdrawal, which then would lead to job cuts in the country.  To us at TMR, we believe this simply illustrates the perception that government activities are the greatest threat to mining profitability and success worldwide. Speaking of government activities, that raging socialist, Hugo Chavez of Venezuela, is at it again by devaluing the Venezuelan currency, named the "Bolivar".  This has led to international companies being forced to re-value downward their Venezuelan holdings and, most interestingly, has also led to companies being forced to obey an American Securities & Exchange edict which declares that Venezuela is now to be treated as a "hyperinflationary economy" for accounting purposes   Any remaining foreign mining operations in Venezuela would appear likely to have the value of their balance sheets negatively impacted as well. Finally, it became apparent someone is at last opening their eyes to the potential negative impacts of throwing endless aggravations in the path of mining when the Pentagon in Washington just indicated, as Liam Pleven just wrote in the Wall Street Journal, that there are concerns, "...about the cost and availability of resources deemed vital to national security."  The American security problem is compounded by the reality that China - perhaps the only conceivable true threat to American security down the road - now controls 90% of rare earth mineral production and the Pentagon is clearly concerned about developing reliable alternative supplies, perhaps from Canada. (As an aside, I will be visiting several rare earth and special metals projects in Quebec in late May and early June to learn more about Canadian exploration for those valuable materials, focusing particularly on rare earth minerals and lithium exploration developments.) Finally, and in line with our long-term belief that any economic recovery will likely be accompanied by growing inflationary pressures, we noted two simultaneous financial articles, one detailing that American "Factory Orders Surged Again" and the other noting, "Raises Creep Back Onto Salary Scene."  We believe deeply that given the artificial creation of currencies which has been ongoing worldwide during the past 18 months, it is unlikely we will be able to enjoy strong economic growth while maintaining low inflation.  Ergo, within the expectation of higher inflation, we remain long-term bullish on the monetary precious metals with our the strongest focus on gold itself. Gold is certainly showing its strength this morning and as of 10:00 AM PDT, the yellow metal had surged by $22 to an inter-day high of $1,198, the highest level since the all-time peak of $1,230 of December 2009.  Silver has not kept pace with gold and is barely ahead this morning while both platinum and palladium are recovering slightly from very sharp losses over the past few days.  Base metals also showed sharp declines early in the week and are close to unchanged so far today while mining share indexes have moved ahead by about two percent, thanks to gold's strong performance.  Crude oil has continued its sharp sell-off, falling to under $79 this morning while the US Dollar has advanced strongly, resulting in sharp declines in both the Euro and the Canadian Dollar. - - - - - All quotes US$ unless otherwise noted. Next "Melman Minute" scheduled for tomorrow, May 7, when we plan to particularly focus on currency market developments.         ◄  Previous Minute                                                                                                        Next Minute  ►
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