A Melman Minute By: Leonard Melman MELMAN MINUTE - August 11, 2010 - - - - - Well, the Federal Reserve Board acted on schedule yesterday afternoon with their announcement that the economy was not recovering as well as had been expected.  In accordance with that statement, they indicated there would be another leg of Quantitative Easing (QE), undefined in size as of this date, in order to stimulate economic activity. There is little question that the economy has not been growing at anywhere near the rate optimists had been expecting and the chart of lumber provides us with ample evidence.  Following the debacle of late April to Late June which saw the price of lumber fall from $338 to $181 on the September contract, the Fed helped drive mortgage interest rates to their lowest level on record.  However, as can be clearly seen, all this accomplished was to provide a miniscule rally in September Lumber to about $222, and that rally has now faded with lumber once again under $200. Another chart reflecting the market's growing concerns is the 10-year US Treasury Note which shows that the price of such notes is headed strongly higher, resulting in a sharp decline in 10-year rates and, we believe, represents a loss of confidence in the economy at large, convincing many that their only monetary salvation lies in U.S. Treasury paper. The Fed failed to define a specific quantity of QE, but indicated it might be moderate, at least at first.  As the Wall Street Journal noted in an op-ed piece this morning, "The Federal Reserve waded back into "quantitative easing" Tuesday, albeit with only one leg this time.  But the message is clear that if the economic outlook deteriorates further, the Fed is prepared to do what it takes to reflate.  Chairman Ben Bernanke stands ready to live up to his famous nickname of "Helicopter Ben." Fortunately, there is an item of economic data which will allow us to follow the Fed in its reflation efforts.  That number is the "Total Fed Credit" (TFC).  As the Fed buys debt paper belonging to banks, other financial institutions or the government, that number rises and, conversely, as such debt instruments are sold or repaid, the TFC number falls. TFC held relatively constant near $870 billion until the first round of QE in late 2008 when it suddenly shot up to $2.24 trillion in December of that year.  It has fluctuated modestly since that time and, as of August 9, 2010, the figure stood at $2.309 trillion.  Some analysts believe that the latest program will increase TFC to over 4.0 trillion.  Should that figure be reached or exceeded, we believe the ultimate impact would be inflationary and, as a result, likely to be positive for the precious metals. We plan to watch TFC closely in coming months and report periodically in these columns. .........    It is our belief here at TMR that the Asian markets, particularly those involving the two most populous nations on earth, China and India, have the potential to offer strong support for the price of gold over the coming months and years.  Several factors play into this concept. First, both nations are advancing economically.  China has recently become the second most powerful economy on earth, behind only to that of the USA, while India, starting from a much lower base, is now becoming one of the most important information-based economies on earth, creating a substantial number of middle and high-paid professional positions which are fueling the growth of a new and potent middle class - something that has never existed in India in modern times.  In each country, the number of persons able to afford gold jewelry and coinage is advancing rapidly. Second, both countries have a long history of affinity for storing wealth in gold rather than trusting major banks.  In India, the custom of presenting gold jewelry at major personal happenings such as weddings is deeply embedded in the populace while in China, there is a deep distrust of private banking establishments. Third, there is an growing aversion, particularly among Chinese government leadership, to continuing investments in Western currencies, especially the United States Dollar.  While they still must be concerned about protecting the value of already-purchased government debt instruments, China's leaders have openly discussed the folly of continuing to invest their surplus wealth inside a country which so clearly is willing to side-step historic procedures which normally enhance fiscal responsibility. When these factors are combined with the reality that worldwide gold production, presently at about 85,000,000 ounces per year, is in slow but steady decline, the potential for a demand/supply squeeze would appear to be growing.  According to the latest figures available from the International Data Base, the world's population has now reached 6.768 billion persons and more than 4 billion live in Asia - with China and India accounting for more than half the number of Asians.  China leads the way with 1.338 billion while India is close behind with 1.157 billion.  If the growing middle class in both countries combined is approximately 250,000,000 - as we currently estimate - and a significant number of those people desire to own gold, it can be readily seen that the newly mined supply of the entire globe would be completely expended in order to provide two-fifths of an ounce of gold for each middle class person.  Anything beyond that would create an immediate supply shortage.  And, to heighten the situation, the number of persons entering the middle and upper classes in each country are increasing steadily. When the demands of the Chinese government to seek an alternative to the US dollar in which to store their trillions of dollars of accumulated wealth are also taken into consideration, the potential supply/demand squeeze could be considerably enhanced, and the demands from the rest of the world, both industrial and economic, must also be added into the equation. As this fundamental information is combined with the seemingly endless creation of fiat currencies by nations around the globe, yesterday evidenced by the continuing willingness of the US Congress to create new spending almost without restraint through its $26 billion state rescue program, it is our opinion that the potential exists for sharp upside surprises in the price of gold, both in the intermediate and long terms, and we suggest such actions could spill over into silver and platinum as well. So far last night and into this morning, securities markets in Asia, Europe and North America have reacted negatively to the Fed's announcement.  As of 9:30 AM PDT, both the Dow Industrials and the TSX Index were off sharply, by about 220 and 250 points respectively.  Gold opened higher but then declined and is down to near $1,196 while silver is also lower.  Base metals have sold off considerably as have mining share indexes as well.  Crude oil is likewise moving to the downside, interest rates are down further this morning and the US Dollar is moving higher against all other major currencies. - - - - - All quotes US$ unless otherwise indicated. Next Melman Minute scheduled for Friday, August 13, 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.