A Melman Minute By: Leonard Melman   July 19, 2010   In our view, there is a strange bit of wishful thinking going on around the world - and we expect the eventual outcome will be to the benefit of the precious metals.  The wishful thinking we refer to is that the world has found an easy way out from present and previous fiscal profligacy.  Its name is "austerity."   You hear it everywhere.  Financial authorities in country after country declare that they will resolve the problems of the lengthy past by adopting "austerity measures" and, in that manner, will begin to correct those errors.  We believe such countries are deluding themselves if they believe that such solutions can be enacted and fulfilled with relatively little pain, which is what most of them presently claim.    We would use the analogy of a drug addict, who has been an increasingly frequent user of a powerful narcotic for several years.  The narcotic inevitably works its way deep into his system and begins to inflict incredible harm until, finally, the addict has no recourse but to recognize that he has reached a "reduce or die" situation.  The great problem is that in the course of reducing or eliminating the drug, his body rebels at that deprivation and it is seldom pretty.   According to a study entitled "Withdrawal Syndromes", jointly published by Patrick L. West, MD, Clinical Instructor, Oregon Health and Sciences University and Nathaniel Mckeown, TO, Assistant Professor at the same university, there is a definite pattern involved in addiction and withdrawal.  The authors note, "Many illicit drugs and chemicals, including medications, produce withdrawal syndromes when their use is discontinued."  The authors specifically include opioids and stimulants in their addiction categories, which could easily make for a real comparison between narcotics used for bodily stimulation and those used for the artificial creation of currencies and debt, utilized by nations and international financial bodies for fiscal stimulation.   We believe their next comments are vital for our comparison.  "The body, when exposed to any type of substance, attempts to maintain homeostasis (the maintenance of normal, internal stability)...to keep the body in balance.  When the substance is removed, the residual counter-regulatory mechanisms produce unopposed effects and withdrawal symptoms...Tolerance depends on the dose, duration and frequency of use..."   What are some of the withdrawal symptoms?  The authors list many, including tremors, insomnia, disorientation, agitation, hallucinations, tremulousness, abdominal cramping, leg cramping, gooseflesh, nausea, vomiting and diarrhea.  We have all seen cinematic and documentary portrayals of quitting cold turkey and it is not a pretty sight.  We also have seen portrayals of how addicts, upon encountering these symptoms during attempts at "cold-turkey" quitting, usually beg for new doses of the drug within days or even hours, despite their previous heartfelt vows to the contrary.   It is our opinion at TMR that the usage of fiscal stimulants over the past eighty years, their virtual total integration into the financial systems of nations and the rise of enormous classes dependent upon such stimulation will make the withdrawal symptoms - if such stimulation is actually withdrawn as many now promise - the equivalent of the gruesome ordeals faced by many addicts.  We also believe that it will not be long before the financially-addicted billions out there will scream in unison for relief, regardless of the future cost.   A series of articles coming out of Spain, truly one of Europe's most troubled nations, highlights the enormous difficulties facing European countries as they begin to impose their various versions of "austerity."  In Spain's case, their great difficulty stems from the fact that their economy is already in a state of collapse before the new austerity measures are implemented!   Unemployment currently sits near Depression levels of 20%.  Youth unemployment is a staggering 40%.  The Spanish government is drowning in debt and has been able to offer nothing but short-term band-aid solutions.  Quite literally, millions are now threatened with the loss of their homes due to mortgage defaulting.  Their Gross Domestic Product (GDP) is in decline meaning government revenues are already falling.   The pain for individual Spaniards was described in a Globe & Mail "Report on Business" article entitled "The Pain in Spain" which described the agony now being suffered by a once-prosperous home-owner named Jaime Cadena.  Cadena moved to Spain from Ecuador ten years ago and became a naturalized Spaniard.  He found steady work in Spain's then-booming construction industry and eventually bought an apartment for his family, including four children (now teenagers) and his now-separated wife.   Unfortunately, he lost his construction job during the collapse of Spain's residential real estate market, has been unable to keep up with his mortgage payments and the bank is now in the process of seizing his home.  His wife could not stand up to the troubles and left him and he is now faced with the great question of how to provide for his children in the face of little to no work, a cessation of his unemployment insurance and a shrinking of already-minimal welfare benefits.   He fears that instead of his rising home equity providing for the university education of his children, they will now be faced with insurmountable difficulties, given Spain's 40% youth unemployment figure and will turn to gangs and drugs, problems that are rapidly spreading into blighted urban areas.   The head of one housing-rights groups told the newspaper that, "I talk to hundreds of people in this position, and many of them just decide to take their own life...And why not?  What is there to live for?"   Problems, of course, are not limited to Spain.  Both Portugal and Ireland have had their debt down-graded by rating agencies, making it even more difficult for them to float the loans needed to at least maintain a semblance of government services.  The situation for many might truly become desperate in the relatively near future.   And so we come to that frequently-named situation, being between a "rock-and-a-hard-place."  The rock is that governments must re-finance or die.  The hard place is that only austerity measures will lead to some sort of fiscal stability thereby allowing for such re-financings, but those could likely come at the potential price of massive fiscal and social disorder, perhaps best described as fiscal and social, "... tremors, insomnia, disorientation, agitation, hallucinations, tremulousness, abdominal cramping, leg cramping, gooseflesh, nausea, vomiting and diarrhea."   It is our belief that the seeming insolubility of this dilemma will lead to a growing sense of panic and uncertainty, which could surely put upward pressure on the price for gold and silver.     While long term prospects for precious metals prices may indeed have merit, for the short term at least, markets appear concerned about slowing economic growth.  As can be noted on the September silver contract, the white metals appears ready to break lower following another sharp decline this morning and the case with gold appears similar.  As of 9:00 AM PDT this morning, gold is off by another $8.00 to the upper $1,170s while silver has fallen by about 20 cents to just under $17.60.  Base metals are close to unchanged while mining share indexes have fallen by another two percent this morning.  Financial markets are split with the Dow Industrials close to unchanged but Canada's TSX is off by about 100 points.  Crude oil is slightly higher while the US Dollar is little changed from Friday's close.   All quotes US$ unless otherwise noted.   Our "Melman Minute" schedule is uncertain for the coming week due to travels to Oaxaca state in the south of Mexico to explore a developing project in that region.  If Internet connections allow, we will prepare an abbreviated report either Wednesday or Thursday.  Otherwise, our next MM will be Monday, July 26.   Hasta La Vista !    ◄  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.