The prolonged and recently aggravated European debt crisis has now resulted in a forced rethink of the very foundations of the union. French President Sarkozy has asserted that his country and Germany will now aim to propose a revamp of the original treaty towards 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 towards 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 Merkel remained steadfast in her declarations that no Eurozone bonds should see the light of day and that the ECB should not take on an expanded role in the region’s attempts to resolve the mess. Her preferred path toward ‘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 toward 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 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 while silver bounced 80 cents higher to $33.53 the ounce. Within less than half an hour, and in the wake of US economic news and cautious words coming from Ms. Merkel, the former was ahead by only $3 while the latter showed only 39 cents’ 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, Ms. 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 of fiat currencies, of the EU, or the inverse, as well. No Koombaya, 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.