The swings in fortunes for both the base and precious metals over the past few weeks have been nothing short of astonishing.  Since early September, gold has endured a top-to-bottom loss of almost $400 and then turned around to quickly recover almost half that figure.  The gold chart shows the decline from nearly $1,930 to a low of around $1,540, followed by the recent surge which has carried gold to an intra-day high of about $1,720 earlier this morning.

Copper has followed a similar path, falling from an early August high of about $4.57 per pound all the way to just below the $3.00 per pound mark prior to the recent rally which has peaked above $3.60 this morning.

Both metals are also mirroring action in the financial markets themselves.  Using the Dow Industrials as an example, that average peaked in late July near 12,700, then fell to below 10,500 by early October only to recover swiftly to just under 12,000 late last week.

We are also watching a compression of time where moves which took months or even years to develop are now occurring within a few market weeks or even days and gold is an excellent example, as the latest rally from $1,600 to this morning’s peak above $1,720 – a move of 7.5% - has taken place in only four trading days.  Even more remarkable has been copper’s four-day advance of fully 18%! 

We believe the magnitude of these sharp moves has been driven by the concentration of attention on government actions to resolve various global or national crises, particularly the dismal economic outlook for America which is shared by many ‘experts’ and the ongoing European monetary crisis which never seems to be finally resolved, but which has been subject to numerous positive or negative rumours – followed by appropriate market action.  As long as markets are focusing their attention almost totally on day-to-day public relations releases, it appears likely we will continue to see a prolonged period of sharp but indecisive moves.

News out of Europe has once again captured a significant part of the world’s economic attention with the most urgent matter under discussion being the final resolution of Greek government debt held by many bankers and private investors.

One of the latest suggestions is that Greek bondholders, both bankers and private individuals, take a 50% devaluation of their holdings.  Of course, many banks will fall below their legal capital requirements if they take such a severe write-down of their Greek debt and so, attention is now turned to exactly how the European Union, through its European Financial Stability Facility (EFSF) will funnel sufficient monies into those banks to allow them to escape legal default.  The latest estimate amounts to about 110 billion Euros or about $150 billion.

It also does not seem to have occurred to anyone that if the banks do receive those funds, they must be carried as new debt obligations which will weaken, not strengthen, the overall banking balance sheets.  It is a mess without an apparent solution, despite the optimistic statements issued on a periodic basis – and it is spreading, not narrowing.

It is apparent that the situation in Italy is as bad as many have predicted.  The Silvio Berlusconi government appears vulnerable to defeat and the austerity measures enacted by that government have resulted in rioting on a substantial scale which makes it unlikely the measures demanded by the European Community before any rescue can take place will not be enacted into law.  Apparently, Italian legislators enjoy living.

One of the most straightforward demands is that the retirement age in Italy be increased from 65 to 67 which would have the eventual effect of lowering government pension payments.  However, even that concession is moderated by the fact that any major improvement in that category will not take place for many years as those on the cusp of retirement will not be affected.  The retirement age is a particular sticking point because much of the financial muscle behind any rescue program will be provided by Germany and that country recently enacted legislation advancing their retirement age to 67, so Germans cannot see the point in paying Italians to retire earlier than they can do themselves.

Italy’s debt has now reached 120% of GDP, far beyond what is normally regarded as a fiscally responsible level and the second worst in Europe, ahead of only Greece in that category. 

However, the problems with Italy are far larger than Greece as the total government debt outstanding is now near 1.9 trillion Euros or $2.69 trillion.  If Italian debt goes into default, rescuing the banks on such a scale would be far beyond the present capabilities of the EFSF. 

We have also learned this morning that the Italian crisis has begun to engulf the world’s oldest continuing bank which has operated since 1472, Siena-based Banka Monte dei Paschi di Siena SpA.  They currently hold more than 32 billion Euros of Italian government debt, more than four times their capital cushion.  The bank has been forced to curtail its charitable donations to many area organizations, imperilling those organizations’ ability to provide important community services, thereby adding to feelings of potential disaster.

And, in the meantime, Spain faces general elections on November 20 when a new President is expected to be elected, thanks to massive disillusionment on the part of the Spanish public as they watch their national economy continue to descend from the heights attained to only a few years ago.

Overall, our impression is that Europe is a basket case and the threads holding it together are wearing very thin.  Perhaps that is why gold and silver are once again headed higher, at least for the time being.

As of 9:45 AM PDT, gold is up by more than $25 and has just exceeded the $1,725 level with silver advancing to $33.57.  Base metals are split with copper and zinc headed higher while lead and nickel are moving to the downside and mining share indexes are up slightly.  Financial markets have retreated somewhat from very strong openings and the Dow Industrials are now up less than 50 points while Canada’s TSX shows a gain of about 18.

In other markets, the US Dollar is sharply higher, crude oil has lost earlier gains and is now down by about $2.00 per gallon and long term interest rates are up slightly.

All quotes US$ unless otherwise indicated.

Next Melman Minute scheduled for Friday, October 28, 2011