No matter where investors turn for news, they're bound to hear headline after headline of dire financial crisis all around the globe. Some experts feel that a turnaround could happen at any moment; other experts are not so optimistic.
Leonard Melman, author of The Melman Report, is extremely bearish on the global economic picture, and we've heard his views before.
Recently, we spoke to Mr. Melman at Cambridge House International's Montreal Investment Conference and he gave some additional insight about the coming economic crisis with us, as a follow-up to discussions and a presentation he gave at the conference.
He started by telling us about one of the conference's discussions: "The basic thrust of the discussion was the future price movement of precious metals. Several points were raised during the discussion and one of the points I mentioned was that I believed the European financial crisis took a truly ominous turn in the past week (November 11 to November 16). What had been contained within four countries (Greece, Italy, Spain, and Portugal), suddenly widened to involve France, Austria, Netherlands, and Hungary, as all of those countries (plus others) reported that they suddenly had to pay much more interest for their borrowed funds. All that was going to do was have an adverse effect on their attempts to balance their budgets, which would make the situation even worse."
He warned that this is only the beginning. The crisis isn't contained among the countries just listed but will continue spreading: "The fact that it's spreading so fast is a sign of some real contagion out there," he said. "It could become ominous-looking in 2012 and may even spill over into the US banking system and, indirectly, on the US dollar".
"I believe that 2012 will be the year that the US dollar starts coming under real selling waves. That could change the whole ball game in an ominous manner," he said.
This related to a talk he gave later at the conference, called "The Economic Perfect Storm". The title of his talk related to a Hollywood movie of a similar name. He explained: "There was a movie a couple of years ago called 'The Perfect Storm'. In the movie, a growing hurricane moved up the coast in the US, and at the same time there was a low front developing over Quebec and Labrador, between the two was a strikingly powerful cold front. They met over the Atlantic and the hurricane fed massive quantities of energy and moisture into the already developing low, which became a massive storm, and the cold front intensified everything. These three elements coming together created a perfect meteorological storm. The same things are developing in the world at large, economically."
Then he described the economic perfect storm that is taking place right now: "The European financial crisis is getting out of hand. The US budgetary mess shows no intellectually sound movement toward any resolution. A growing international dilemma, caused by Iran developing nuclear weaponry, is threatening Israel's security and could threaten the world's supply and distribution of petroleum. On top of it all, we've got banking systems that are so shaky, no one has come up with a cohesive plan to return them to prosperity. When you put all those elements together, the end result could be truly frightening."
But there's even more bad news, according to Mr. Melman: "It's almost a case of 'heads, you lose; tails, you lose'. If the economy improves, there has been so much money circulated around the world during the last 4 or 5 years that a sudden industrial surge could overwhelm supply, which would force prices to skyrocket and would create its own set of problems. But if you have industrial failure on top of all these other things, then you could have a rising panic that would depreciate all fiat, unbacked currencies, and would therefore propel inflation into hyperinflation." Then he added: "There's danger in almost every direction you look."
What is confusing the matter among some economists is the strength of the US dollar against the Euro, and Mr. Melman addressed that issue: "When I'm asked why the US dollar is showing strength every time there is relative weakness in Europe, I like to give this analogy: You're walking through hospital with a doctor and he opens the door to one room and he shows you a patient who is very sick – they're breathing heavily and have a bad complexion. The doctor says 'He has stage 3 cancer.' Then you walk past the next room and the patient in that room is gasping for air and looks even worse. The doctor says, 'he has stage 4 cancer.' Then you go past the third room and the person is just lying there, comatose; barely able to even open his eyes. The doctor says 'he has stage 5 cancer, and I'm sure he won't be with us for very much longer'." Then Mr. Melman explained the analogy like this: "The US dollar is like the patient with stage 3 cancer. Yes, it's bad but compared to the patient with stage 4 cancer (which might be the Euro) or the patient with stage 5 cancer (which might be the Hungarian Forint, which is self-destructing as I talk), the US dollar doesn't appear quite so bad… but it's still in negative health."
Then the conversation turned from currencies to metals as Mr. Melman described what he believed was going to happen in the near future, and how investors should be investing to prepare for it.
About the price of metals, he said: "There are several components to the price of precious metals. One of them is an industrial component, which is simply a reflection of supply and demand. One of the other components – particularly for gold – is panic. I believe economies might slow down in 2012 so the fundamental industrial demand for base metals and silver and platinum and palladium could run into trouble but I think the panic component in gold will increase. I believe gold will waffle until March or April and then there will be spectacular rallies going forward."
After gold, he talked about silver: "I believe silver could profit to a much greater degree than gold. As gold skyrockets to $2,000 an ounce, there are many people who cannot buy gold at that price but they can buy silver at $40 an ounce and buy it in pretty significant quantities. We could see some really compressed buying in silver, which will give it a much greater percentage movement than gold, and therefore silver mining shares – particularly those already in production – could be a profitable investment through the next year."
So, are there any mining shares that Mr. Melman recommends? He gave us two that are adjacent to each other in a silver-producing region in Mexico: "I had the privilege of visiting two silver mines that I found particularly attractive. They are located in the state of Guanajuato in Mexico: Great Panther Silver Limited (TSX: GPR) and Endeavour Silver Corp (TSX: EDR). Both are in production. Both are carrying on active exploration programs. They're showing positive cash flow. Their stocks have weathered the storm much better than ones that are purely explorational efforts."
But there might come a point when even these stocks aren't sufficient for investors, and Mr. Melman advises a more drastic approach to investing for survival: "You want to get away from that kind of currency and invest in real things – gold, silver, copper, zinc – anything that is an item that humanity needs to survive. I think there's going to be a movement from monetary assets into metals. Even currency-backed ETFs worry me a little bit: I wonder if the gold or silver is really there. If I look at a world that becomes increasingly desperate in coming years, I want to know that I have those assets – physical possession of gold or silver that is stored in my own private property."
Editor's Note: In another recent conversation with Mr. Melman, he told us about an article he wrote as part of his "Melmania: series: "This article is on the proposition that we are past the point of no return in terms of individual liberty, hard currency, and limited government, versus the rapid expansion of government intervention in every direction accompanied by massive fiat currency creation. Recently, there was an attempt by the European central community to convince the IMF to issue $250 billion worth of special drawing rights and turn them over to the European banks so they could buy up the bank's default debt. That's just money creation on top of money creation. That's what I think is happening around the world."
Mr. Melman's warnings can seem grim and depressing, but the ones who take note of his advice and prepare for the worst will find much more stability and peace-of-mind in the years to come. Mr. Melman's insight is a warning to all investors to plan ahead because most outcomes seem dire.
Leonard Melman's site: http://themelmanreport.com/
Cambridge House International's Montreal Investment Conference: http://cambridgehouse.com/conference-details/montreal-investment-conference-2011/59
Great Panther Silver Limited: http://www.greatpanther.com/s/Home.asp
Endeavour Silver Corp: http://www.edrsilver.com/s/Home.asp