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By Jon Nadler
The midweek session started with sizeable gains in the precious metals complex as bullish participants interpreted the ESM-related ruling by Germany's top court as one more sign that all things official will only help their cause. Of course, as is normally the case, the headline is what caused the stir, while the details of the ruling evidently appear to have escaped the notice of the stock and commodity shopping-spree crowds.

To wit: the German court categorically insists that Germany must first secure Parliamentary votes in favor of any further increases to the ESM. The court has not delivered a full ruling on the complaint by the plaintiffs, but merely a temporary injunction of same.

The court stressed that that the ESM treaty bans it from borrowing funds from the ECB (a violation of EU law). The court will not permit the ESM to deposit bonds to serve as loan collateral with the ECB.

Moreover, the court ruled that Germany must say that it won't be bound by the ESM treaty unless the above conditions are fully met. The court said that Germany cannot be allowed to bear the burden of amounts that it cannot control and of liabilities that arise out of "decisions by the will of other states." Just a few "details" –for starters, before we define the rally to $1.29 by the euro as the new "floor" and the new "normal."

In fact, Nomura Securities feels that the court ruling spells the end of the euro's recent rally, and not a push to some wild new highs. Nomura said the euro has risen only because of a short-squeeze and that such a phase is nearing its end at this stage. The firm is "looking for fresh short[ing] opportunities from here."

Spot gold traded at $1,744 (up about $10) while silver climbed 30 cents to the $33.90 area this morning. Platinum surged by nearly 2.9% ($45) per ounce, overshadowing the rest of the complex and reaching $1,651 per ounce. Palladium climbed $7 to $683 the ounce. Analysts at Standard Bank (SA) note that "the situation at platinum mines near Rustenburg remains tense as workers refuse to return to work or negotiate. With reports of widespread intimidation of Anglo Platinum workers this morning, platinum and palladium are finding renewed support." They conclude that their "view remains unchanged - we do not believe that it is worth being short platinum and palladium at this time even though demand is weak and despite the strong rally witnessed over the past few weeks."

Gold recaptured a good portion of Monday's double-digit price losses on Tuesday, but the ebb as well as the "flow" were little more than nervous moves made with no other justification than the upcoming Fed meeting and its possible aftermath. While almost everyone is firmly convinced that a QE2-sized QE3 is to be unveiled tomorrow, replete with a 500-600 billion dollar gift card for the markets' players to speculate with, the possibility that Thursday might still result in disillusionment continues to preoccupy a few seasoned observers.

One such source, CPM Group's Jeffrey Christian opines that the US central bank will say just enough to appear on top of the game tomorrow and that it might even throw a few bucks at the hungry speculative hordes in order to appease them. However, Christian, who appeared on BNN TV's "The Close" last night, does not see a "trumpet-blasting" announcement of a large-scale asset purchase program coming at this time.

Therefore, Christian sees the oil, gold, silver and stock markets as setting themselves up for a possibly sizeable disappointment if the Fed does not "come through" for them tomorrow afternoon.

In gold's case in particular, after the recent, $140, solely "Fedspectations" - based move to the upside, there is a chance of a $50 to $75 post-Fed correction to ensue - even if not all at once. Silver is just as - if not more- vulnerable to a "fluff-clearing" dip if the Fed fails to hand out the handout. Christian remains more positive on the prospects for platinum and palladium in the post-Fed environment.

Christian is not a lone voice in this regard; Global Hunter's macro-strategist, Richard Hastings, cautioned yesterday that "If additional Fed action does not happen, then the monetary side of gold's story would come under pressure, risking a breakdown closer to $1,625" an ounce. The market might get annoyed if the Fed is going into a prolonged watch-and-wait phase - talking about concerns and [being] ready to act, but waiting until things get sufficiently bad to act."

Other sources worry about the current price of gold without paying attention to the Fed meeting and/or what the calendar says. Marketwatch's Mark Hulbert, focuses his gaze upon the gold timers and utilizes contrarian analysis to characterize the tenor of the market.

As of yesterday, Hulbert noted that "Unfortunately, contrarian analysis is not nearly as positive today about gold's prospects as it was three months ago. That's because, in the wake of the recent rally, gold timers have jumped on the bullish bandwagon, all but destroying the veritable wall of worry that would otherwise support a continuation of gold's recent rally."

The Gold Newsletter Sentiment Index was still negative the day before which (Aug. 23), "in classic contrarian fashion, the market responded to the strong wall of worry that those negative readings represented by rallying strongly. But that wall of worry has all crumbled. Another revealing comparison with the HGNSI's current level comes with where this sentiment index stood in February, when gold bullion rose to the nearly the $1,800 level. The HGNSI that month never got as high as it is now," Mr. Hulbert remarks.

Hulbert concludes that "these various data points, taken together, suggest that the gold market has gotten ahead of itself. That's why contrarian analysis now concludes that a short term pullback is now more likely." How much of a pullback is not what Mr. Hulbert cares to estimate in his writing, but he does give us a hint of a possible time-horizon that could be involved.

He notes that "since 1985, however, according to an analysis of the HGNSI, the average correction in the wake of high readings lasts between one and three months. That means that, if the gold market behaves in "average" fashion, we should expect bullion to be lower than it is today between early October and early December." Perhaps now is not a good time to mention one EW-based technician who proffers a target in gold of between $1200-$1300 in November or December. Well, we did it anyway.

The Wall Street Journal described this week's emergent market situation with the finding that "Investors have Cornered the Fed" and it couldn't have been more correct in doing so. In lieu of a Fed that can go about its business (those dual mandates we all hear about) independently and at its own pace, we now have a virtually hostage-to-the-markets Fed; one which could essentially be damned if it does, and damned if it does not (ease, that is). Time and again, we have been treated to aggressive voices from "The Street" telling us that if the Fed does not "give" well, then, the sellers will "give" it something to remember them by; a slide of epic proportions.

This time around, the same voices are treating the possible QE event as an already done-deal and –while not admitting it- they have already committed large enough sums of money to various asset markets to essentially force a decision in their favor. Who cares if $500 billion in to-be-purchased bonds only brings US unemployment down by less than half a percent, if at all? Not the speculators, to be certain. The addiction to the "Fed Fix" has reached the point where the junkies cannot even remotely entertain the thought of withdrawal. It has been two years since the last high. The monetary opiate injection cycle must continue, and, hey, they would prefer that it becomes "open-ended." You know how all of this goes: "Fundamentals? We don't need no stinkin' fundamentals!"

The week, thus far, has been filled with headlines that sound like clones of one another. "Xxxx Rises Amid Fed QE Expectations" –where the "Xxxx" can be substituted for the asset of your choice, ranging from gold, to oil, to the Dow. Albeit less often, other stories told of "Xxxx Seen Falling On Fed Speculation." Again, take your pick; any substitution is as good as any other.

However, and just for one example, the curious case of the S&P 500 being less than 10% from its all-time record high at the same time as gold is roughly 10% from its own previous price pinnacle has failed to spark the inquisitive impulse among financial writers and advisors alike. The Dow closing at its highest level since 2007 yesterday also failed to elicit any concerns by euphoric gold bugs at this juncture. This is the "new normal" where it is just fine if everything floats to the top, folks. Don't worry, be happy.

Don't worry, that is, unless you're holding gold stocks and have been doing so for some time by taking advice from writers whose bills are paid by compensations from the stocks they promote. While the yellow metal has managed to sustain a run above its 200-day moving average since Aug. 23, a whole bunch of mining issues have not duplicated that feat. While we shall get plenty of $2,000+ gold predictions, the lag and/or disconnect between bullion and the producers thereof is not something we're likely to hear about in the reports from the Denver Gold Forum. That situation, unless it changes fast, is seen by TheStreet.com's contributor Richard Suttmeier as a "warning for gold." The six equities cited in the analysis are ABX, AU, GFI, HMY, and KGC –all majors.

We close this morning with one more bit of controversial headline material. Yesterday, a lot of noise (reminiscent of last summer's US rating-related noise) was made about Moody's warning that the US being headed for the so-called fiscal cliff might imperil the outlook and eventual rating of the nation's debt. It turns out that, owing to the fact that firms such as Moody's and other that were asleep at the switch when the mortgage debacle was staring them in the face, the ratings jockeys are barking up the wrong proverbial tree.

"Heretical" statement number 48: The fiscal cliff is good for the USA. The fiscal cliff is good for the budget deficit. The fiscal cliff should strengthen US debt. If you are in the business of rating the odds of a particular piece of debt being repaid, then the fiscal cliff should prompt Moody's to do the opposite of what it did the other day.

No one is saying that taking the plunge off of the aforementioned cliff is the better way to go about the business of cutting debt, come 2013. However, do take note of the following math provided by Marketwatch's Washington Bureau Chief, Steve Goldstein: "The CBO says the US budget deficit would shrink by nearly $500 billion in just the first year if the fiscal cliff is triggered. From a current 7.3%, [of GDP] the budget deficit will shrink to just 0.4% of gross domestic product by 2018 if the fiscal cliff path is taken." Who can argue with that? You want to once and for all address the deficit bogey? Take the plunge!

Until after the Fed fireworks,

(The author is the senior metals analyst - Kitco metals)