Equities, commodities, gold and silver surged yesterday as investors flooded back into the markets following the announcement of a new plan to deal with Europe’s sovereign debt crisis. Stock markets around the world recorded strong gains; America’s S&P 500 has enjoyed its biggest monthly gain since 1974, while US equities as a whole have enjoyed their strongest monthly rally since 1987. The 14% gain in the copper price this week is the biggest weekly gain in that metal since 1986, while the 20% monthly rise in the Dow Jones Transportation Average (a proxy for US economic activity) is the biggest monthly gain in this index since 1939. Additional cheer was provided by news that US GDP gained 2.46% during the third quarter – more than twice the gain recorded during the second quarter.
Unsurprisingly given the general reflation trend, precious metals put in strong performances yesterday. Gold broke over $1,740 per ounce and silver returned once again to territory north of $35 per ounce, with October Comex silver futures gaining 5.4% to settle at $35.095. GoldMoney News was right to highlight the strong bullish indicators in recent silver COT reports, as well as the contrarian value of doing the opposite of what fund managers think. As we said last Friday, commenting on the news that funds had turned bearish on commodities for the first time since February 2009:
“Of course, we all know what happened to commodity prices after February 2009. The low for commodities in February 2009 was around 317 on the CRB Index. Today, and despite the steady decline in commodity prices since the spring of this year, the CRB Index stands at 507 – a 60% gain from February 2009. Thus, if we were to use trend-following fund managers as a reliable contrarian indicator, now would seem to be a good time to go long commodities.”
However, triumphalism is dangerous, and there are still many black swans out there that could derail this latest commodity advance. Only time will tell.
The inverse of all this was a weakening US dollar – with the greenback “taken out to the woodshed” in some style: the Dollar Index losing a full 1.79% to settle at 74.88. The dollar has now very definitely returned to the bearish daily trend evident earlier this year.
As for the eurozone’s problems, all is sunshine and light – for the moment. But as The Wall Street Journal points out in its editorial yesterday, even in the “best case” scenario this new plan envisages for Greece will still result in that country having government debt of 120% of GDP by 2020. Without structural economic reforms that encourage sustainable wealth creation in countries like Greece, this latest plan amounts to little more than reshuffling the deck chairs on the Titanic.
Media talk has now turned to where the EU is going to get the money to boost its bailout fund (from around 440 billion euros to 1 trillion), and how Europe’s banks are going to bolster their balance sheets as this new plan requires. China has indicated that it may be willing to contribute $100bn to the fund, while the smart bets are on the IMF issuing more and more SDRs as a means of funding bankrupt governments. Ultimately though, this is still just another way of creating money out of thin air.
