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 - June 11, 2010 - - - - - One of our favorite analysts over the past several decades has been the frequently dramatic Harry Shultz.  Harry has been publishing his newsletter for many years and while he has been more than slightly controversial at times, we have found his writings to be most worthwhile over the past few decades.  Therefore, it came as a very pleasant surprise when we find that his latest press release, published on the Moneynews site, could have been 'lifted' directly from our recent Melman Minutes. As reported by Dan Weil, Mr. Shultz also believes that short term economic contraction might lead to temporary spates of deflation, but, "...it will turn into hyperinflation soon."  As mentioned, Mr. Schultz never indulges in veiled or half-statements, so his next concept is starkly worded.  "We are poised at a heart-stopping moment in economic times.  On one extreme side, the world is on the edge of massive deflation and depression.  At the other extreme, hyperinflation." He explains this seeming contradiction by noting, "Deflation is the issue now because money supply is actually declining...Hyperinflation seems impossible when there is not much inflation in most economies, but hyperinflation is a monetary event, not an economic one, and will happen on an overnight basis, not via a general uptrend in inflation data." Shultz also added commentary that the recent rise in gold to record highs and the concurrent downtrend in stock prices were "ominous signs."  He considers the new high in gold as an indicator that the hyperinflation scenario is truly pending because, "...if it were exclusively deflation ahead, gold's action would be less buoyant."  He added that he sees gold heading to $6,000 per ounce! Conventional economists disagree on balance, tending more toward the "inflation under control" consensus, but being on the "wrong side" of economic arguments has never deterred Mr. Schultz, whom we had the pleasure of meeting in South Africa in the early 1980's. His thoughts are worth considering, particularly the note about hyperinflations happening 'suddenly'.  That is one of the reasons why we believe prudent investors should maintain some sort of 'insurance' positions in the precious metals. As can be readily observed, the trading price for Crude Oil has been locked inside a relatively narrow trading range between roughly $70 on the downside and $85 per barrel on the upside for almost one year, since mid-2009.  It is as if there was a tug-of-war with two equal strength teams pulling 'might and main' at the end of a rope. One team is negative and is tugging the price to the downside due to expectations of contracting demand resulting from economic slowdowns and environmental efforts to reduce petroleum consumption.  The other end of the rope is being tugged to the upside by those who believe that important supply shortages are looming due to rising consumption from auto-crazed Asia as well as potential supply contractions due to the playing out of aging oil fields.  With that scenario in mind, we came across a recent petroleum market study prepared by Energy analyst Charles Maxwell of Weeden & Co. and published in Bloomberg/Business Week magazine under the authorship of Christopher Farrell. After noting that the world is continuing to consume petroleum at a rate of 85 million barrels per day (mbpd) despite the economic slowdown, Mr. Maxwell turns to the concept of "Peak Oil."  According to Maxwell, the term refers to the situation when a country - or the total world - is consuming oil faster than new reserves are being discovered and brought into production.  According to that definition, the USA 'peaked' in 1970 and has been going downhill since, to the point where it now imports fully 67% of its consumption. His greatest concern is that many of the non-OPEC countries which have significant oil production are now peaking or have already passed that point.  He also believes that world oil production in total will begin to decline irrevocably by 2015 to 2020.  As a result of this threat to future production levels combined with what he predicts as a continuing healthy demand, he expects prices to begin to rise steadily and reach $150 to $300 per barrel before the end of this decade. As an additional note, he declared, "...I particularly like the Canadian (oil) companies with strong presences in the oil sands of northern Alberta...Oil companies with long-lived reserves will be highly profitable over the next decade." From our point of view at TMR, it is remarkable that the price of petroleum has recovered so strongly from the $33 per barrel bottom of early 2009, despite the generally negative economic conditions in much of the industrialized world. Given its importance to the world's inflationary equation, it is well worth watching the price of petroleum in coming weeks and months.  When market performance differs from fundamental expectations, we tend to look for some unusual explanation.  In this case, we believe there is merit indeed to the "peak oil" concept. Markets this morning are relatively quiet following the strong moves of yesterday which saw financial markets roaring ahead and precious metals falling back.  As of 10:20 AM PDT, financial markets are mixed with the Dow Industrials off by about 30 while Canada's TSX is ahead by nearly 25.  Precious metals are mixed with gold up by $8.00 while silver is slightly lower and the base metals are higher on balance.  Mining share indexes are up about .5%, the US Dollar Index is up by 30 basis points and interest rates are mostly unchanged while crude oil is trading down today, off by $1.65 to $73.83 per barrel. - - - - - All quotes US$ unless otherwise noted. Next Melman Minute scheduled for Monday, June 14, 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.