I Have Seen The Writing On The Wall


By Jon Nadler

Dec 19 2008 9:44AM


Good Morning,

Friday was the euro's turn to take an uppercut from the dollar and stagger in the ring, as forecasts of a 10% decline against the dollar over the next 90 days were issued by UBS. The BoJ reduced call rates to 0.10% but traders felt it will have little impact, and they remain divided on the effectiveness and likelihood of direct intervention to curb the yen's rise. A near half-trillion dollar stimulus package is nearing a launch in economically beleaguered Japan. A major retreat in crude oil to near $33.50 per barrel was the other major headline early this morning. Oil producers have started to wag cartel-ish like fingers at the world, warning that low prices imply future scarcity. The greenback's 1.40 point boost on the index brought it to just above the 81 level and set the stage for a second day of sharp declines in gold and silver.

Thus, gold bullion suffered its worst drop in three weeks as the dollar's surge diverted would-be buyers and emboldened profit-takers. Poor physical demand in key markets is obviously still playing a pivotal role in gold's short-term fortunes. We reported on Dubai's 80% slump yesterday. Today we note that gold buyers in India are patiently sitting on the sidelines, awaiting an opportunity to buy the metal at near $790 or lower once again. So much for high premia as being a reliable indicator of coming price increases. India does love gold. At a price. Just not this one. Conditions will remain volatile as trading thins out before the holidays. The onus remains on the bulls to prove that the December move has not been a false breakout.

New York spot gold trading opened near $832 per ounce, showing a 2.32%  near-$20 loss from last night's close as traders lopped more points off of the overbought relative strength numbers seen earlier in the week. Lows overnight were recorded at $829.20 per ounce. Dazzled by gold's 20% December surge, perma-bull analysts once again pulled out the obituary columns looking for a brief notice on a Mr. Greenback. Silver broke support at $10.82 and fell 27 cents to open at $10.69 per ounce. Platinum dropped $5 to $848 and palladium shed $2 to $174. US automakers might receive some bridge loans to keep them on life support until March, but the outlook remains as dark as ever. The White House now allows for the 'orderly' bankruptcy scenario as a palatable option.

As the world churns amid its worst economic crisis since the last global war, something else is stirring as well, and it is the one factor which ought to be near the top of the worry list of leaders everywhere. Social unrest is beginning to manifest itself at a time when people - especially young people - feel that their future prospects are cloudy-to-bleak. Anger against those they see as feathering their own nests while leaving them without a nest to call their own, has sparked rage in Europe's youth. Bloomberg's Celestine Bohlen reports on the disturbing syndrome and its spreading trend:

"Firebombs and breaking glass, tear gas and burning cars. The images from Greece this month were enough to put the fear of youth into the hearts of European leaders. That dread was palpable in France when President Nicolas Sarkozy abruptly delayed for one year a plan to overhaul France’s high schools, after students from Bordeaux to Brittany took to the streets in protest.

Those demonstrations haven’t turned violent yet. But French history, and the example of Greece, suggests they might. At least that is what people like Laurent Fabius, a Socialist Party leader, are saying on French radio.

“What we see in Greece is not out of the realm of possibility in France,” Fabius said on Europe 1. “When you have such an economic depression, such social despair, all it takes is a match.”

An editorial in the daily newspaper Liberation said the decision to delay the education law -- which would change schedules and academic requirements for the last three years of lycee, or high school -- was purely defensive. “One senses among the team in power a hesitation, a dread of riots, a fear of explosion,” wrote Didier Pourquery on Dec. 16.

The rapid rise in unemployment among people under age 25, particularly in southern Europe, is one concern. In Spain, for instance, youth unemployment shot up from 18.4 percent in August 2007 to 28.1 percent in October 2008. The average jobless rate for young people in Italy, Greece and France is well above the average for the European Union, according to Eurostat, the Luxembourg-agency that collects EU statistics.

‘Going Nowhere’

“All these events have at their core a sense among youth that their lives are not going anywhere, and they have nothing to lose,” said Ken Dubin, a visiting associate professor at University Carlos III in Madrid. But economics alone doesn’t explain the restlessness in universities and high schools. Students, after all, have no jobs to lose.

Experts speak of another worry, which is the seemingly anachronistic resurgence of vague radical movements, loosely called anarchist, which hark back to the destructive ideology of Mikhail Bakunin, the 19th-century Russian revolutionary, and to the rebellious rhetoric of the 1960s and 1970s.

Some of it isn’t that threatening, such as recurring play of the 1979 song, “Another Brick in the Wall,” by Pink Floyd, on Athens’ Alpha radio during the week-long protests. “We don’t need no education/ We don’t need no thought control/ No dark sarcasm in the classroom,” goes the angry refrain.

Behind the Slogans

But the violence wasn’t far behind the slogans. By the third day of rioting, the estimated damage in Athens and Thessaloniki, Greece’s two biggest cities, was more than 1 billion euros ($1.3 billion). The riots in Greece began as spontaneous protests to the killing of 15-year-old student by police in Athens on Dec. 6, after a group of youths started stoning a police car. It spread to university centers around the country, quickly morphing into a wider contest between young people and the police and by extension, the government.

Greece has a history of violent demonstrations that dates back to the colonels’ junta in the 1970s. The National Technical University in Athens, known as the Polytechnic, has been off- limits to police in homage to the events of Nov. 17, 1973, when the government sent a tank crashing though the university gates, igniting a popular uprising. Now the Polytechnic is again occupied by protestors, who have built barricades from broken marble and paving stones, and stockpiled Molotov cocktails and other weapons.

Clear Message

The role of these so-called anarchists in the week-long protests is still not clear. But their message -- loaded with anti-capitalist, anti-government and anti-globalization themes - -is unmistakable. Also clear is their bent for violence.

“What they provide is a template that others with less ideological commitment, can use,” said Stathis N. Kalyvas, a political science professor at Yale University. “If you have a demonstration where 10 of them start throwing stones, soon the 500 others following them will join in.”

France isn’t the only country nervously watching the events in Greece. Students in Italy and Spain have also staged protests against proposed changes to schools and universities recently. In Madrid, Barcelona and Sevilla, they took over administration offices this month in opposition to changes mandated by the EU that would link higher education to marketable job skills.

In Italy, hundreds of thousands of angry teachers, students and parents mobbed Rome on Oct. 30 to protest an overhaul of the education system, in what was described as the largest student demonstration since 1968.

Turning Ugly

Each country brings its own issues, and history, to these demonstrations; like Greece, France has a tradition of street protests turning ugly. In October 2005, youths in Paris’s suburban and largely Muslim ghettoes, went on a rampage, causing 160 million euros in damage, after two teenagers were killed as they were being chased by police. In 2006, university students staged demonstrations that dissipated into random violence, as hundreds of thousands protested a proposed law that would create flexible work contracts for young people. The government eventually withdrew the legislation.

This year’s “lycee” protests also carried hints of escalating violence. A high school principals’ association in the Bouches-du-Rhone region warned on Dec. 5 of “an unheard-of aggression and near-impossibility of dialogue” with protesting students. Philippe Guittet, head of the association, told the Le Monde newspaper that he suspected the protests were propelled by “militant forces” working behind the scenes. France chose to defuse the situation by withdrawing the contested schools legislation. In Greece, the government, eager to restore calm, has decided for now to cede the Polytechnic to the protestors.

That might buy peace for now, but it won’t necessarily soothe the anger."

Never underestimate angry youth. Charismatic leaders of the extremist type have a knack for channeling malleable young souls on fire. This concludes today's public service announcement.

Today's focus will remain on the dollar, just as yesterday. A sagging Dow in the face of auto sector uncertainties and warnings from Weyerhauser might not help matters either, as far as risk-taking goes. A 'defensive' play at this juncture might just be sitting on the sidelines and watching others lose money.

Good Day.

Jon Nadler
Senior Analyst
Kitco Bullion Dealers Montreal


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