Apocalypse (Not) Now

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"Gold continued to exhibit the same patterns of risk asset behavior that copper, oil and equities have been displaying while the European saga has been unfolding."

The prolonged and recently aggravated European debt crisis has now resulted in a forced rethink of the very foundations of the union. French president Nicolas Sarkozy has asserted that his country and Germany will now aim to propose a revamp of the original treaty toward a paradigm that includes a "convergence" of some type that is designed to avert the demise of the region’s common currency.

Translated into plain English the "convergence" plan means that the union will be pushed toward some kind of fiscal common platform or at least toward stricter regulatory tenets that would make it difficult, if not impossible, for any single member nation to gorge itself on too much debt in the future. Markets, of course, cheered the proposals with their usual "risk-on!" and "buy everything!" display of speculative optimism this morning.

Albeit German chancellor Angela Merkel remained steadfast in her declarations that no Eurozone bonds should see the light of day and that the European Central Bank (ECB) should not take on an expanded role in the region's attempts to resolve the mess. Her preferred path towards "daylight" from this quagmire is to get the region to strengthen its economic ties. ECB President Mario Draghi adopted a somewhat "softer" tone, however, and was interpreted as leaving the door slightly cracked toward a possibly more interventionist European Central Bank if certain fiscal union principles are indeed cobbled together.

All of this remains to be seen, as we head towards a pivotal EU meeting slated for one week from today. In the meantime, whatever the markets do is largely based on conjecture and the ebb/flow of risk on/off sentiments from day to day. Hanging onto every headline and darting in diametrically opposite directions in the wake thereof has defined investor behavior of late. That is not likely to change any time soon.

Today's example comes from an optimistic interpretation of a proposal (as in: not a done deal) to funnel European central bank loans through the International Monetary Fund (IMF) and endow the troubled countries with as much as a fifth of a trillion euros. The bonds of two of the potential beneficiaries (Italy and Spain) of such a lending scheme rallied today, as did the usual suspects in various other (commodity and equity) markets. Risk is on at least for the better part of today or until the next scary headline hits the wires.

Gold continued to exhibit the same patterns of risk asset behavior that copper, oil and equities have been displaying while the European saga has been unfolding. Today was a day to start on a positive footing at least for the initial part of the trading morning. Gold opened $12 higher at $1,757/oz, while silver bounced $0.80 higher to $33.53/oz. Within less than half an hour, and in the wake of U.S. economic news and cautious words coming from Merkel, the former was ahead by only $3 while the latter showed only $0.39 worth of gains.

Chancellor Merkel dismissed the odds of a quick fix to the debt debacle this morning by comparing it to a marathon that might take years and not weeks or months to reach the finish line. Speculators and other quick-buck makers were reminded that this is a process and not an imminent event. In a way, Merkel’s metaphor was a direct rebuke of the words coming from an agitated Tony Blair who declared that Europe has "only weeks left to solve its crisis." Other sources posted headlines such as “Only 10 days left to save the euro!”

Take zat, Herr Blair! Therefore, any opinions of the extremely confident or desperate kind that you might run across when you read various doomsday-flavored newsletters ought to be taken with an equal dose of skepticism when it comes to declarations of the demise, or fiat currencies, of the EU—or the inverse, as well. No Kumbaya, but no TEOTWAWKI either. It is more like the Ramayana, 50,000 lines of verse that take some time to read and digest. As regards the yellow metal and declarations about it—which are also more than abundant at this time of the year—the principal question remains just how much of the fear and distrust present in the markets has already been priced into $1,700+ bullion. Some feel it is not nearly enough, others feel it is more than ample.

Call it profit-taking, call it book-squaring, call it news-based trading, the result is the same: Volatility remains an integral part of the metals' markets and to a degree that is not comforting to traditional buyers of same. Back in the day, a metals trader might go home and tell "wild" tales of a $1 gain in silver or of a $20 move in gold to incredulous family members. Nowadays, it's as routine an event in either metal, or either direction, as brushing one's teeth.

Platinum advanced $3 to the $1,564 mark, and palladium continued its monster rally with a 3% rise to $652/oz. Rhodium remained slightly lower at $1,625/oz, after having slipped $25 yesterday. In the background, the U.S. dollar narrowed earlier losses to trade at 78.20 on the trade-weighted index, and dollar-bullish traders are seen as still having the upper hand at the moment, despite minor setback against the euro this week. Black gold gained nearly $1 and traded near $101 per barrel, while copper staged a 2% advance. Once again, the tallies showed palladium leading the pack of gainers in percentage terms.

Partially lost in the wave of news from Europe was the fact that the U.S. economy added 120,000 jobs last month and that (more importantly) the jobless level in America fell to a 30-month low at 8.6%. Critics were quick to point out that the shrinkage in the unemployment rate was due to more than 300,000 people having stopped searching for jobs. However, such critics were remiss in noting that U.S. firms continued to hire folks at a modest but steady clip.

America’s labor force has increased by about one million positions in the period from August to October. Add to that the fact that the latest ISM data revealed a modest gain in November (rising to 52.7% and remaining above the 50% dividing line for the twenty-eighth consecutive month) and the following words of a couple of Fed officials make some sense. Philly Fed president Plosser opined that the U.S. is not headed back into recession, while St. Louis Fed head Bullard said the recent data suggests that monetary policy makers should not rush to ease further but should instead adopt a wait-and-see attitude. U.S. economic growth came in at the 2% level in Q3 and might rev up to 3%-3.5% in 2012, thus making a QE3 maneuver questionable.

As we head into the weekend, we turn to the market-related musings coming from Standard Bank. Analyst Steven Barrow leaves us with words of wisdom (and possible strategy) to keep handy in coming days:

"There’s a huge week coming up next week, including the EU summit and monetary policy meetings from the ECB, MPC, RBA, BoC and RBNZ. There’s also the first dollar auction from the ECB under the new lower-rate structure. . .Our general bias is still to be somewhat risk averse on a longer-term basis but, notwithstanding today’s payrolls, risk aversion might not return rapidly. . .The question is whether to start positioning for more risk aversion this side of year-end given that liquidity is so thin and, for a short time at least, Eurozone policymakers might persuade the markets that they are on top of the problem (as the central banks seemed to do on Wednesday). With this in mind, it is probably not best to try getting involved on either the long or the short side of risk assets right now. If we see some sort of huge risk-rally into year-end, with euro:dollar around 1.40, for instance, it might be very tempting to act this side of the New Year."

"This side" now entails but 19 opportunities to "get it right" in the near-term. Tick. . .tick. . .tick. . .

Jon Nadler, Resource Investing

Jon Nadler is senior metals analyst with Kitco Metals Inc. in Montreal.

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