GoldMoneyNews'  Instablog

Slowly but surely, the European Union is creeping towards a deal to attempt to solve its debt crisis. Yesterday, European Central Bank president Mario Draghi addressed the European Parliament for the first time since becoming ECB chief at the start of November. He called on eurozone governments to quickly craft a "new fiscal compact," calling it "the most important element to start restoring credibility." He added "other elements might follow, but the sequencing matters." The markets chose to interpret this as coded language indicating that the ECB may be willing to print much more money to buy distressed government debt, provided that the eurozone’s leaders get their act together and press for greater fiscal union and more European Commission “oversight” over national budgets.

Wednesday’s dollar-swap move has bought the eurozone some more time, though the fundamental problem remains that the structure of EU governance is ill suited to dealing with crises. With 27 heads of government comprising the European Council, any kind of consensus on big changes to Union – and they don’t get much bigger than proposals to give the Commission veto powers over taxation and spending policies in member states – will inevitably involve tough, time consuming negotiations and bureaucratic haggling.

This sort of stuff usually takes the EU years and even decades to pull off. Alas, with markets as nervous as they are, the EU doesn’t have the luxury of time. Thus, it’s not surprising to see French president Nicolas Sarkozy growing impatient with Brussels’ crab-like advance – noting in a speech yesterday the need for “a new European treaty refounding and rethinking the organisation of Europe… It is not by going down the path of more supranationality that Europe will be relaunched."

As the blog EUReferendum notes dryly, commenting on this speech:

“So, we are either back to the Directoire, run by France, the Franco-German Axis or an intergovernmental "core group". None of those will play well in Brussels, where such plans will have all the longevity of a toilet roll in a dysentery clinic.”

Moving across the Atlantic, bullish new US manufacturing data out yesterday provides further signs that American economic activity is picking up. Reuters quotes one economist who notes that "The economy seems finally to be developing real momentum".

Absent from the Reuters report is of course any comment on the Fed’s vast money printing efforts over the last few years, and how the surge in M2 money supply over the last few months is what’s responsible for these improving numbers.

Today’s US nonfarm payroll and unemployment numbers should also surprise to the upside. Consensus estimates among economists are for the unemployment rate to remain at 9%, but for 131,000 gains in nonfarm payrolls. It will be interesting to see what the results turn out to be.

As reported in the London Telegraph:

“A survey of 68 top City institutions by the Bank of England found that 54pc of respondents reckoned the probability of a short-term "high-impact event" to be "high or very high" – a level not witnessed since the survey began in July 2008, just two months before Lehmans' tipped the world into recession.

Respondents said they feared a eurozone debt crisis and another economic downturn most.”

This comes just two days after a warning from the British Prime Minister David Cameron that clearing the UK’s deficit was “proving harder than anyone envisaged”. Partly this is because the “cuts” that are supposedly happening on Cameron’s watch are in fact nothing of the kind: British government spending increased by £22.8 billion during the coalition government’s first year in power, with spending projected to increase by another £20bn this year. As ever with government, what is actually happening is a reduction in the rate of increase in state spending.

Many assume that linear, real-increases (as opposed to nominal, non-inflation adjusted increases) in government spending are a human right – a fact of life akin to the law of gravity. But as Dr Chris Martenson discusses in his Crash Course video – well worth watching – for the last 40 years this steady increase in state spending has been funded by exponential increases in total credit market debt. The problem now is that the productive part of developed societies simply cannot cope with the kind of exponential increase in debt that is required for these societies to grow in the manner that they have done over the last 40 years:

As Martenson notes, commenting on the chart above:

“Consider a chart of total credit market debt. It tops out at about $52 trillion (T). Each of those big, blue, upside-down triangles mark a doubling of credit market debt. From 1970 to about 1977, total credit market debt doubled. It doubled again by 1983. Then it doubled again and again and again. Over four decades, we had five doublings of our credit market debt. In order for the next 20 years to look like the last 20 years, we would need two complete doublings of credit market debt. Let me put those numbers in: $52T to $104T to $208T. That is an absolutely obscene amount of credit growth. This is not how our economy is supposed to function. It was a result of the abandonment of the gold standard, and it is not sustainable.”

(As an aside, the GoldMoney Foundation’s James Turk recently interviewed Chris Martenson, for a video that will soon be released on this website).

This is the kind of macroeconomic backdrop all investors need to bear mind when considering media talk of government “cuts” – usually nothing of the kind – and “austerity”. Day-to-day gyrations in gold and silver prices will happen, and we can still expect to see sudden sharp sell-offs in both metals, as hedge funds scramble to cover losses on other investments with paper profits from gold futures and ETFs. This trend has been evident over the last few days, and – barring some kind of black swan event that sends the price shooting higher – the gold price will need some more quiet consolidation time before its ready to take out its record high around $1,920 per ounce. In the words of the self-styled “original gold bug” James Dines: “(market) moves almost always take longer than expected.”

For more of the fundamental reasons why the decision to buy gold is a wise one – along with more colourful and interest charts – check out this link to Bud Conrad’s Casey Research piece, titled: Is Gold Still The Answer For Investors?

Global contagion fears drove the price of risk assets down in trading yesterday, with commodities and small-cap stocks fairing particularly badly. Precious metals were also hit in the general liquidation panic, with Comex gold for November delivery losing 2.7% ($46.40) to settle at $1,678.30 per troy ounce. Comex silver for delivery in the same month lost 4% ($1.30) to settle at $31.11 per troy ounce.

Platinum and palladium likewise suffered – The Wall Street Journal noting that investor demand for palladium has fallen significantly this year as a result of concerns over slowdowns in emerging markets. As one analyst quoted in theJournal notes: “many investors have been buying the palladium ETF as a play on growing emerging market auto demand. As the outlook for car market and emerging markets has slowed, so has enthusiasm from palladium traders." ETF Securities, the world's largest palladium ETF provider, said Monday its two palladium funds, ETFS Physical Palladium and ETFS Palladium Trust, have recorded $388 million of net withdrawals so far this year, leaving total palladium assets under management at $694.5 million.

As James Turk argues in his latest piece for the King World News Blog, the fallout from the MF Global bankruptcy is threatening another “Lehman moment”. As James notes: “investors should be concerned because everything is so inter-connected today. People call it contagion and this contagion is real because the MF Global bankruptcy is going to have a knock on effect, just like Lehman Brothers had a knock on effect.”

Furthermore, one insider is warning that the debt crisis in Europe will likely result in a bank holiday: in the words of Dr Pippa Malmgren – former White House financial markets advisor and former deputy head of global strategy at UBS – “ultimately, I will not be surprised to see Europe’s banking system shut for days while the losses and payments issues are worked out.” In contrast to the USA and UK, eurozone banks have not been recapitalised following the problems in 2007-08. Europe’s banks remain among the most highly levered in the world – with three-times as much leverage in the eurozone banking system as compared with the US.

Amid all the gloom and doom, however, US economic statistics continue to surprise mainstream economists to the upside. Yesterday saw existing home sales for the month of October rise by 1.4% to an annual rate of 4.97 million units from September’s revised rate of 4.90 million. Economists polled for Reuters had expected a fall to 4.8 million.

As is slowly becoming apparent in America, it is unwise to underestimate the power of a central bank that is determined to re-inflate the economy.