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NANOOSE BAY, BC - TGR: It seems that economists can plan and recommend, and politicianscan negotiate and maneuver, and pundits can analyze and predict allthey want, yet when the people don't want to play along, it can allmean nothing. Of course, we're talking about the elections inFrance and Greece. What's going on? Leonard Melman: What's going on is that the monetary authorities in Europe havedecided that austerity is the only way out of the financialdilemma, which I find kind of amusing, because it is theirKeynesian activities that created those policies in the firstplace. Their decision now is that austerity, which is cutting backgovernment programs, is the only thing that will work. The problemis that the public doesn't want their government benefits cut back.So, the message from the French people was that Nicolas Sarkozy,with his austerity, was no longer their friend and FrançoisHollande, with his promise to end austerity, is now the newPresident. In Greece it's even more dramatic. Greece has been afunny culture for about 40 years living in a dreamland, thinkingthat nobody has to work and nobody has to pay taxes, which is sortof their national sport. TGR: Not paying taxes is a national sport? LM: It's a high art with the people in Greece. Yet they still expecttheir government to give them early retirement, generousunemployment benefits, etc. That has been supported for the last 40years by massive government borrowing. And, that's the realityafter this election. The people voted out those politicians who, atleast on paper, wanted to cut back the size of government. Nowthere could be a real crisis directly ahead of us. TGR: Does that mean the Eurozone is going to blow up? LM: It's under the strongest threat since its creation 13 years ago.Greece cannot pay its debts. Because of the recent election, themonetary authorities who had been providing Greece with funds canno longer be sure that their program is going to be approved by theGreek government. If that's the case, they may suspend furtherpayments to Greece and Greece will officially begin to default onits debt, which will be a likely cause for expulsion from theEurozone. If that happens, all Greek monetary matters will be restored to theprevious currency unit, the drachma. Nobody has the foggiest notionof what the drachma will be worth because it's a totally artificialcurrency to begin with. We are seeing one consequence that hasshowed up in the market the last couple of days. Many people inGreece are getting scared and are converting their funds primarilyinto euros and U.S. dollars. That's one of the reasons why the dollar has become stronger andprecious metals have become weaker. It also raises the specter of atrue run on banks as people withdraw their euro assets. Lying inthe wings are Spain, Portugal, Italy, Ireland, Iceland, etc. Infact, there are nine Eurozone countries that are in recession. So,if the question is could the Eurozone blow up, I think it is agenuine possibility that several nations could be forced out, whichwould leave the Eurozone in a shambles. TGR: With all of this bad news, the precious metals markets don't seemto be responding positively. When will they be impacted by this? LM: For most Europeans, the U.S. remains the financial bastion of theworld. So, when Europeans look to convert assets from weakness intostrength, they usually look for U.S. government debt paper. Buyingthat debt paper makes the U.S. dollar stronger and gold and silverweaker in reflection. That will end when the U.S. dollar weaknessbegins to show itself; then we should have much more positiveaction in the metals. TGR: In light of what's happened here recently, what are yourexpectations now for gold and silver? LM: The number of people who are losing, or have lost, faith inconventional politicians and economists to guide the world'saffairs is growing. As that continues, I believe more and more oftheir assets will be turned into the precious metals as the havenof last resort. The question is when. In my annual forecast I said,and still believe, that this trend would accelerate throughout thesecond half of the year, creating pressure for the precious metalsto rise dramatically. October, November, December, I believe, willbe great months for the precious metals. TGR: Is it going to take some great catalytic event for this to happenor will it build slowly? LM: The French and Greek elections could have provided that catalystalthough they're talking about another election in Greece within amonth. But, this has shown there's a great difference between whatthe politicians and economists want to do and what the public willaccept. It's like a drug addict who vows to quit because he knows the harmdrugs are doing to him. Three or four days after quitting he's inthe agony of withdrawal and will do anything to get more of thedrugs. That's the case with several of the nations in Europe. Theyknow the damage that excessive borrowing has done and now they'regoing to stop cold turkey. But, the people relying on thatgovernment borrowing don't want to lose their welfare, retirementor other government checks and they're rioting in the streets. Thatrioting and disillusionment is in its early stages and could getmuch worse. That's another reason for precious metals to go muchhigher. The resolution to undergo austerity is not going to bematched by the public's deeds. TGR: So how high could gold and silver go? LM: The downside over the next two months could be about $1,400/ounce(oz). During the latter part of the year, I have forecast a top ingold of about $2,400/oz and a top in silver about $55/oz. TGR: It seems like $55/oz is a little low on silver compared to$2,400/oz gold. You're not a major silver bull? LM: I am. Let's say gold bottoms at $1,400/oz and then goes up to$2,400/oz. That's a gain of about 65% or 70%. If gold gets down to$1,400/oz, silver could hit $24-25/oz. If it goes to $55/oz from$25/oz, that's a gain of about 120%. So, as the accelerationdevelops, I expect silver to go faster than gold. It's been weakerthan gold, so it will take a little longer to advance. But, I havealways believed that in powerful metals bull markets, silveroutperforms gold on the upside, just as during declines it fallsfaster than gold. TGR: So, you aren't looking for $75/oz silver as some people are? LM: Not quite this year. But if this massive disillusion and evendistrust of public monetary authorities occurs, who knows whatnumbers we could be looking at in 2013? But, $55/oz seemed aboutright when I made the forecast in writing and I'll stick with it. TGR: Going to mining stocks, which you cover in your Melman Report , the big question that most investors have is when are theirmining stocks going to take off and start behaving the way theyexpect? What do you think? LM: While gold has almost doubled, the major mining shares havedropped by an average of about 40%, and many of the junior shareshave fallen by more. So, it's been a dismal period, especially inthe last year. The major difficulty during the past few years has been the longertimelines in advancing exploratory projects to production, due tothe regulatory and environmental hurdles. When I started writingabout gold and trading shares as a stockbroker in the mid-1970s, itwasn't unusual to advance a project from discovery to productionwithin two or three years. So, you only had to raise sufficientcapital to cover that period. Now projects can take 8-15 years toget to production, if they succeed at all. That results in greatercapital requirements and a lot more share dilution. That's having anegative impact in the junior sector. The major mines seem tocorrespond much more closely to the price of the metals themselves.But for the juniors, that long regulatory process creates a majorproblem for share prices and dilution. TGR: What do you think of the rare earth market? LM: The rare earths have been hot numbers and then cooled off. WhenChina first announced that it was going to reduce exports to theWest, rare earth shares in North America went crazy on the upsideand have come back almost as rapidly. So, it's a differentsituation with them. They're more a hot play of the moment asopposed to gold, which is much longer term. Rare earths blow hot, then cold. But, then they could very easilyblow hot again. The fundamental argument for rare earths isexcellent. They are absolutely essential for modern technology,including defense weaponry systems. The fundamental demand for themhas nowhere to go but up and questions have been raised aboutChinese supply, among others. So, I think the North American rareearth junior mining shares could easily get hot again. TGR: Where do you think things are headed from here and what should ourreaders be focusing on to avoid the pitfalls and make some profitswhen this market turns around? LM: I like the juniors with production financing that are activelybuilding facilities to go into production or that have alreadyachieved production. That enables them to grow so much fasterwithout serious dilution. I still love gold and silver. Silver has the added bonus of beingan industrial as well as an investment metal. My big picture tellsme that the great force behind gold and silver in the coming monthsand years is the growing fear factor. Once the public perceivesthat international financial matters are really getting out ofcontrol, they will start moving assets from conventionalinvestments into the precious metals. There was an article in Barron's in December 2010 where the author stated that, according to hisresearch, when inflation begins to accelerate towardhyperinflation, the precious metals tend to rise 2,000% to 50,000%faster than the rate of deterioration of currency. That's anenormous factor down the road and I think, historically, it makessome sense. So, my big picture is that disillusionment withinternational financial monetary authorities is growing and fearwill be rising. Once the image of the U.S. dollar as a pillar ofstrength begins to diminish, which I expect in the second half ofthis year, I think we will see real fireworks in the preciousmetals. TGR: What is the best investing advice you've ever received, thatyou've either taken or wished you had taken? And, what's the bestadvice that you have for people who are just starting out asinvestors? LM: The best investment advice that I've received and want to pass onis to look for the one play that, considering the risk involved,has odds that are truly powerful in its favor and that will provideoutsize rewards. And, I'll tell you exactly which one I like; theonly question is the timing. Right now, interest rates are thelowest they have ever been in history. The one interest rate futurethat stands out in my mind is Federal Reserve funds that areyielding virtually zero for the short term. Short-term notes arequoted at about 99.87 vs. 100.00 face value. So, they're yielding0.13% with virtually no risk to the downside. All you're risking is13 basis points because interest rates aren't likely to ever gobelow zero. The kicker is that those contracts extend more than twoyears out. The spring of 2014 contracts are trading now at about99.65. So, there's 35 points potential downward action. Over thenext two years, the pressure to start raising interest rates isgoing to become severe. If rates reach 3%, these contracts fall to97.00, which would provide about 265 points of potential profit.Anytime you can put logic behind an investment and have a potentialreward that's 9 or 10 times the potential risk, then I'm veryinterested. I think the logic behind interest rates starting torise within the next two years is quite powerful. TGR: Great advice. Thank you so much. Leonard Melman , publisher of The Melman Report, has been writing about precious and base metals for more than twodecades as monthly columnist for California-based ICMJ's Prospecting and Mining Journal and Vancouver's Resource World Magazine. He focuses on how political and financial considerations impact theworld of mining and the prices of the metals. Article published courtesy of The Gold Report - SUBSCRIBE to Mineweb.com's free daily newsletter now. The e-commerce company in China offers quality products such as Handle Plastic Bags Manufacturer , Tea Packaging Bags Manufacturer, and more. 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