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Melman Minutes - By Leonard Melman
 
MELMAN MINUTE March 9, 2012
 

Financial market optimists received a "shot in the arm" this morning when the new jobs figures for the month of February were announced by the U.S. Department of Labour showing net non-agricultural job growth of a relatively strong 227,000 last month and also an upward revision to the January figure.  The official Unemployment Rate remained at 8.3%.

 

Given the magnitude of the jobs figure coupled with the news out of Europe that the Greek Debt situation had overcome a significant hurdle, namely the acceptance of a plan to only partially repay private Greek government debt holders, it might have been expected that financial markets would soar on a combination of such news, but that has not been the case as in the first hour of trading, the Dow Jones Industrial Average was showing only marginal gains and the average itself remained slightly below last week's peaks just above the 13,000 mark.  (see chart)

 

 

 

During the past week when our attention was focused squarely on the mammoth PDAC convention, a great deal of news was transmitted and one of the best means of reviewing these events is to take a look at some of our most important one-week charts, starting with the yellow metal itself.

 

 

Gold endured yet another periodic sell-off late last week and early this week, but then recovered smartly in mid-week, regaining the $1,700 mark before encountering fluctuation so far this morning.  After opening with good strength, gold fell sharply following release of the jobs figures, perhaps anticipating that pressure on the Fed to further ease monetary restraints would diminish, but early in the second hour of securities trading, gold began to rally sharply once again.

 

Crude Oil has had a similar pattern with some strong selling followed by a good recovery and, as of a few minutes ago, Crude was now once again close to the $108 per barrel mark after having fallen to as low as $104.40 per barrel.  Since moving back above the $100 per barrel level, Crude Oil pricing has been named as one of the most pressing problems for economists to resolve since rising petroleum complex prices - specifically including gasoline - could be a prime factor in re-igniting inflation fears, which could then lead to rising visible price inflation, something the political establishment is desperate to avoid.

 

 

One other chart is worth examining and here the news is not positive for our world of base and precious metals mining.  Despite some good activity in individual shares, mining share Indexes have performed poorly over of the past while, as exemplified by the XAU Index which plunged sharply from above 200 to barely 183 before recovering in the past few days to just under 190.  As we noted in a previous Melman Minute, the mining share indexes have drastically under-performed action in gold itself.  The yellow metal has more than doubled since early 2008 while the XAU Index is actually net down from its 2008 levels.

 

This relative under-performance was a hot topic during PDAC and some of the reasons offered by various speakers included the growing expense in time and money of meeting all the regulatory requirements now cascading down from the computers of bureaucrats; rising costs for transportation, fuels and supplies; a severe shortage of competent geologists brought about by many years between 1980-2000 when mining was considered an unattractive career choice for college students; all combined with a lack of faith among many that the bullish trends in gold and silver are sustainable into the future.

 

It is up to the industry itself to overcome these perceptions.

 

 

A BIT OF MARKET HISTORY

 

Before financial market enthusiasts begin celebrating too wildly over the spate of good news such as the employment gains and the Greek debt resolution (number???), perhaps they should acquaint themselves with an unfortunately market truth which has recurred for decades.  That old adage informs us that many of the markets' most severe sell-offs have taken place just when economic enthusiasm was at its highest.

 

Please note the accompanying chart of the Dow Industrials which covers the past 40 years.

 

 

Market enthusiasm was exceedingly high in late 1971 as the Dow had reached a new record above 1,100, Nixon had just passed his plan to remove gold from the monetary system (presumably to allow government to react quickly to stimulate when needed), trade barriers with China were beginning to come down, etc.  The market then immediately collapsed and by 1974, one of the most devastating market sell-offs had taken place during which the Dow fell to 570 - a loss of almost 50%, the greatest (at that time) since the Depression.

 

In 1987, markets couldn't have enjoyed better news as industrial expansion was rising, employment was rising, profits were rising and the Dow had just neared the 3,000 mark, again the highest in history up to that time.  Within just a few days, the Dow had lost more than 30% of its value.

 

Similarly, things couldn't have appeared brighter in late 1999 with computer firms burgeoning, markets throwing off huge capital gains and unemployment plunging, but the Dow then proceeded to fall dramatically from over 12,000 to under 8,000 and the same pattern recurred in late 2007 as the Dow soared to its historic high above 14,000 amid reports of  low unemployment, high profits and great prospects - only to fall by an astonishing 55% over the next eighteen months. 

 

The great question then is whether this latest Dow rally to the 13,000 level is a harbinger of yet another unexpected sharp decline or whether "this time is different" and the American economy is truly going to move into sustained and non-inflationary growth accompanied by an unending period of minimal interest rates. 

 

The question is directly relevant to our world of precious metals.  If another sharp financial market decline sets in, stunning much of the public and spreading uncertainty and even panic, history tells us the precious metals should rise.  However, if tranquility, optimism and security become the order of the day, the metals may indeed perform poorly.

 

We shall see...

 

 

As of 8:30 AM PST (which changes over this weekend to PDT), financial markets in the US and Canada remain higher with the Dow Industrials and the TSX Index both rising by about 40 points.  Precious metals are holding onto late gains with gold up over $10 to near $1,708 while silver is ahead by over 40 cents to near $34.20 per ounce.  Base metals are stronger by 1-2% on average and mining share indexes have just returned to the plus side.

 

In other markets, crude oil is once again close to the $108 per barrel mark; the US Dollar Index is up by almost a full point; and long term, 30-year US government bond interest rates are close to an upside breakout at 3.202%, the highest in a while.

 

 

All quotes US$ unless otherwise indicated.

 

Next Melman Minute scheduled for Monday, March 12, 2012.

 

 

 
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