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 18, 2010 - - - - - Quite obviously, the most important headline of the moment might be worded, "Gold Rises to New Historic High" as the spot price of the yellow metal exceeded $1,260 for the first time in history this AM.  But, in our view, that is only part of the optimistic news for precious metals advocates. It is said that 'a picture is worth a thousand words.'  If that is true, be prepared for at least three thousand words because we are offering three charts this morning which we believe, when combined together, describe an increasingly bullish sense for the precious metals.  Our opinions are based on two previously time-tested observations.  In the first case, when mining shares relatively outperform the rising price action of the metals themselves, it is an indication that shareholders, who normally buy shares for their future performance (as opposed to metals traders who fallow the then-current spot price), are becoming increasingly positive in their outlook. In the second case, when the performance of silver is compared to that of gold, we have been able to draw the following conclusions.  When silver outperforms gold in relative terms, that can be interpreted as positive for BOTH because it often means that precious metals are being accumulated and a disproportionate number of investors can afford the lower priced silver over gold.  During the previous several months, both indicators were flashing warning signals, as we summarized a short while back.  Silver was underperforming gold and the mining shares indexes were also underperforming gold.  However, we can now report that a clear change of direction in both indicators has evolved over the past several weeks. Please note the current rally in the August gold futures contract chart began in late May and has carried from about $1,170 to $1,260 or about eight percent.  Next, compare that performance to the recent rally in silver.  That move began in early June with a clear and powerful "one-day reversal" and has carried from near $17.20 to above $19.20 this morning, or slightly more than eleven percent. Finally, please note that while the rally in the XAU mining share index began at almost the same time as the most recent move in gold, is has exceeded the rally in gold in relative terms, moving from near 161 to over 185 this morning, a distance of 24 points or almost fifteen percent! We believe the combined message of these charts is that the outlook for the precious metals is becoming more positive.  At the same time, we would offer our long-standing caution that no investment positions should be taken without prior consultation with a registered investment professional. While short-term news considerations affect the metals markets and therefore the mining industry, we believe it is the powerful, long-standing trends that ultimately and most powerfully influence the direction of various markets.  Part of this philosophy is grounded in the belief that excessive government power and influence leads to inefficiency, waste and economic trauma which is most often 'solved' by infusions of new quantities of fiat currencies, ultimately debasing all currencies when compared to gold.  Two news stories we note this morning seem to confirm the opinion that those trends not only remain in effect, but are being steadily enhanced. In America, the leaders of Congress seem to be united in their statements that British Petroleum's negligence is the genuine cause for the Gulf of Mexico oil calamity.  Such thinking has led to statements that only massive new regulations regarding present and future offshore drilling can insure the public's safety and also that British Petroleum must be punished for their corporate malfeasance.  As a first step, President Obama and Congress have demanded BP set aside $20 billion for immediate relief for those negatively impacted by the spreading oil.  Next, Congress refused to set a cap on the potential long-term liability of BP into the future. It is easy to speculate that this will put a true damper on all future oil exploration and production, increasing America's dependence on foreign oil and further exacerbating their future currency and trade deficit problems. At the same time, word has come out of Japan that their new Prime Minister, Naoto Kan, informed the public that in order to maintain the level of public services while at the same time attacking the size of Japan's budgetary deficit, a doubling of Japan's sales tax rate would be required.  (As it happens, that also violated one of his promises during Japan's recent election campaign, but politicians violating promises is hardly news anymore.) By this move, the new Prime Minister is stating clearly that the means of reducing deficits in Japan is to continue high government expenditures, but finance them with increasing taxation in order to reduce the size of those deficits.  Our concern would be that by increasing taxes you reduce the funds consumers have available to spend and thereby force a contraction of the economy which will then reduce government revenues.  At the end, this policy would seem likely to bring about continually high deficits and a diminished economy. The one course governments generally appear unwilling to try, but the one that many Austrian School economists and Nobel Prize winners advocate is reducing the size, scope and intrusion of government which they believe will lead to increased commercial efficiency, rising genuine income and reduced deficits. Makes sense to us - but those policies are something we are unlikely to see for some time to come, given the current strength of public service unions and the political bases of power around the world. Perhaps gold and silver are trying to tell the world's leaders that they are following the wrong path. As of 9:00 AM PDT, precious metals continue to rally with gold trading at a new record high, just under $1,264 while silver has soared by more than 50 cents to $19.25.  However, the strong rally has been confined to the monetary metals as platinum and palladium are only modestly higher while the base metals are actually down slightly on balance.  Mining share indexes, clearly reflecting gold and silver, are ahead by about two percent.  Financial markets in Canada and the USA are both moving higher with the TSX ahead by over 50 points while the Dow Industrials are up by 25.  Long term interest rates are holding steady and the price of Crude oil has declined to just under $76 per barrel. - - - - - All quotes US$ unless otherwise noted. Next Melman Minute scheduled for June 21, 2010, the beginning of the summer season.  We plan to take a look at a serous statement issued by former Fed Chief Alan Greenspan today, dealing with his fears for the future of America's financial stability.      ◄  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.