Germany takes Europe to the brink

Worldwide markets of all stripes were under pressure right off the bat on the night of Dec. 11, as it became quite clear that the EU summit had once again not accomplished much.

Yes, the Europeans appear to be moving closer to some sort of financial integration/discipline mechanism -- which pleases the Germans. But that is not today's problem.

The more urgent issue is the weakness of sovereign debt markets and European banks. On that score, the European Central Bank has not done enough to stem the onslaught of selling. Thus, the two-year financial psychodrama continues, with the most likely outcome being recession as far as the eye can see, until the ECB relents (or unless a financial collapse happens first, which seems more likely every day).

As if that weren't enough, Intel (INTC, news) preannounced fourth-quarter results on Dec. 12, and industrial production in India was reported to have declined about 5%, versus expectations of just about unchanged. The world economy is creaking, which is why so many central banks are printing money.

But for the time being, Europe is not doing enough printing, so all markets remain hostage to developments there.

Pride of the Valkyries

This week has also made clear that Germany has no intention of playing ball and instead seems determined to stand in the way of any decisive move by the ECB that might give markets what they want -- which is money printing.

Investors have already voted thumbs-down by selling early and often, and they were incentivized to act ever more aggressively on Dec. 14 when Jens Weidmann, president of Germany's central bank, emphatically denied that there would be any money printing by the ECB. "The idea that the required money will be created through the printing press should finally be brushed aside," he declared.

As I have noted in the past, the Germans do not seem to understand that their banking system is leveraged to the eyeballs and holds all kinds of risky government debt -- a redundant phrase these days -- as well as plenty of other debt of a less-dubious persuasion. Thus, they continue to play a game of chicken with themselves.

Nor do they seem to realize that each day, as the situation becomes dicier, it gets closer to screaming completely out of control and deteriorating to the point -- as we are starting to see -- where anything can trade anywhere. Perhaps most importantly, the Germans are exacerbating the evaporation of a fragile variable -- namely, confidence. Once that is lost, it is very hard to regain.

Every night now brings the risk of another episode of the European nightmare. With Germany playing a game of brinkmanship (even though it doesn't know it), a European collapse cannot be ruled out if the ECB doesn't relent -- soon, and in a big way.

Gold heads the wrong way

Around the time of Weidmann's speech, gold plunged about $30 in 15 minutes or so shortly before sinking a similar amount again, in a similar time frame, as silver shed around 7%. A similar drop occurred again the morning of Dec. 15. In all, we saw six 2%-plus moves in the price of gold in six trading days. I don't recall ever seeing so many swift plunges in so few days.

Even more curious, the SPDR Gold Shares (GLD, news)exchange-traded fund has thus far not sold many ounces, implying that the selling is coming either from the physical market somewhere else in the world (which seems possible, but it's not the most obvious explanation) or from the futures market, where open interest has already declined more than 30% from the highs. Of course, that doesn't mean that the selling can't continue; it is just an observation of what the "setup" looks like.

From a psychological standpoint, most indicators are where they get to when gold prices put in a bottom. Market Vane shows just 58% bulls (a reading last seen in late 2008, when gold was about $800 an ounce). And on Dec. 13, both the Central Fund Of Canada (CEF, news)and Central GoldTrust (GTU, news)closed at discounts to their net asset value.

Taken together, this suggests that some sort of a significant low point will be reached sometime soon, although none of these data points can predict where prices will stop once they gain downside (or upside) momentum. However, they do indicate that, in terms of duration, this correction is probably on borrowed time -- though, as noted, that doesn't tell us much about price.

Gold for Christmas?

I wish I could add some intelligent thought as to why the metals have been hammered so hard -- especially given the state of the world (the very thing that drove gold prices higher all year, until recently). But sometimes the market just does bizarre things. It is what I refer to as the "perversity of markets," where they get you to give up on an idea just as it is about to work really well. For those who are interested in gold, but are underinvested, Christmas has come early this year!

On the air

My latest interview with Eric King of King World News is a pretty thorough discussion on the current correction in gold, as well as on the euro and miners. Interested? Listen here.

At the time of publication, Bill Fleckenstein did not own shares of any equity mentioned in this column. He does own gold.

This column is a synopsis of Bill Fleckenstein's daily column on his website, FleckensteinCapital.com, which he's been writing on the Internet since 1996. Click here to find Fleckenstein's most recent articles.