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(Kitco News) - Metals are sharply higher across the board Wednesday in a relief rally after U.S. lawmakers steered the country away from the fiscal cliff, at least for the time being.

Nevertheless, analysts cautioned, more turbulence may occur in the weeks ahead since the legislation approved by Congress in essence provides only a temporary reprieve on fiscal issues and did not address the debt ceiling or include spending cuts.

“What we got basically amounts to giving the markets a very high octane energy drink,” said Sterling Smith, futures specialist with Citi Institutional Client Group. “But that will in fact start to wear off as we move back into the controversy again, which will happen probably sooner rather than later.”

As of 10:40 a.m EST, February gold was $17.60, or 1%, stronger at $1,693.40 an ounce on the Comex division of the New York Mercantile Exchange, while March silver was up $1.098, or 3.6%, to $31.325. Nymex April platinum climbed $35.10, or 2.3%, to $1,577.50 an ounce, while March palladium rose $13.45, or 1.9%, to $716.80.

All six of base metals traded on the London Metal Exchange were up by at least 3%. The gains were led by tin, up $1,060, or 4.5%, to $24,460 a metric ton; and copper, up $317.50, or 4%, to $8,248.50 a ton.

“It’s a bit of a relief rally,” said Bill O’Neill, one of the principals with LOGIC Advisors. “We finally got a temporary fix and rebounded….We have a risk-on day.”

Equities are also higher, with the Dow Jones Industrial Average up by around 250 points.

The fiscal cliff refers to a combination of tax hikes and spending cuts that had been scheduled to go into effect in January had Congress not acted. This was expected to ding the U.S. economy to the tune of $600 billion in 2013, with potential for another recession. Avoidance of the cliff presumably means demand for commodities will be stronger than otherwise would have been the case.

Industrially oriented metals got an extra lift from manufacturing data in the key commodity-consuming nation of China. The HSBC December Purchasing Managers Index rose to 51.5, the highest level since May. A similar reading released by the government held steady at 50.6, matching November’s seven-month high.

“Base metals opened very strongly this morning as the U.S. and Chinese news suggests 2013 could be a positive year for metal consumption,” said a research note from RBC Capital Markets.

Gold benefited as the dollar eased against most major world currencies, with the euro hitting a two-week high of $1.3299. Further, gold draws a benefit since a deal is seen as inflationary by keeping government spending elevated at a time when the Federal Reserve is continuing with its quantitative easing program, Smith said. Conversely, if any future congressional action were to rein in spending meaningfully, this could lessen the appetite for gold, especially since it likely would help the dollar, he added.

O’Neill pointed out that funds were ready to step back into commodities generally after many squared positions ahead of year-end in a broad range of markets, including agricultural commodities.

“Their books are relatively clear, so they’re in a position to come back in,” O’Neill said. “So it bodes well at least for the start of the year. I still think volatility is going to be huge in these markets, depending on the news of the day or week.”

Congress Still Has To Resolve Debt Ceiling, Spending

Potential for more political squabbles is one of the main reasons more volatility could be in the cards for metals and other commodities, since the congressional action addresses only some of the fiscal issues in the U.S. “There are so many pitfalls ahead that you have to expect the markets to have periodic setbacks,” O’Neill said.

The deal approved by Congress raises income taxes on families earning more than $450,000 year. President Obama has indicated he would sign the measure into law. However, the measure leaves other major issues unaddressed, such as the debt ceiling reached this week. Also, the bill only delays most of the automatic spending cuts by two months.

“How long the strength (in metals) lasts is going to be very dependent on how long the happiness in the stock market lasts,” Smith said.

Some analysts caution that the cliff worries could set back into markets as soon as next week, when trading volume is likely to pick up following the Christmas and New Year holidays.

“With the fiscal cliff curtain drawn back, albeit halfway, we should see a stronger tone set in over the markets over the balance of the week,” said Edward Meir, commodities consultant with INTL FCStone. “However, Congress’s uninspiring handling of this issue, typified by running well past self-imposed deadlines and failing to put anything on the table dealing with spending cuts or entitlement reform, means that investors will likely see more roller-coaster action over the next several weeks. For now, however, the buyers are firmly in charge of the asylum.”

By Allen Sykora of Kitco News; asykora@kitco.com

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