Last week we recommended buying the dips in Europe and Emerging Markets after the ECB announced its $641 billion Long-Term Refinancing Operation (LTRO). The ECB is lending a helping hand this holiday season to more than 500 European banks, a necessary intervention given the lack of institutional interest in subsidizing bank bonds.

The ECB is a somewhat reluctant student of modern banking theory as taught by former Princeton Economics Professor Bernanke. According to Bernanke, the modern central bank must be prepared to expand its mandate beyond purely monetary considerations and stand as a buyer of last resort for debt instruments issued by systemically important institutions.

Currently, the Financial Stability Board (FSB) has a global list of 29 systemically important names, 8 of which are in the U.S. The FSB is working on new rules that raise capital ratios for these banks by 2-3%, a move that has been strongly resisted by bank management. Even after triggering the worst financial crisis in three generations, the financial industry is unashamedly balking at further capitalization. Since the repeal of Glass Steagall in 1999, banks have tasted risk and want more of it.

In the fall of 2007, however, as the housing market began to crash, it became clear that the highly leveraged mortgage derivative business would take a huge hit. As a result, gold and silver began to rally. The precious metals were the "Armageddon trade" during the financial crisis and maintained momentum through August of this year. Their relative strength was a stark reminder of the underlying solvency issues, but by the summer of 2011 precious metals were already exhibiting the exponentially-rising signature of a bubble just waiting for a pin.

In mid-August, Switzerland's National Bank (SNB) supplied the pin when it pegged the Swiss franc to the euro, thereby giving the European currency some de facto backing in gold. The Swiss franc and the SPDR Gold Trust ETF (GLD) are highly correlated. In the wake of the SNB action, the gold bubble began to deflate. The Swiss franc ETF (FXF) has since fallen almost 25% from its peak, while GLD is down 19%.

Gold is typically touted as the ultimate inflation hedge, but post-bubble times are different. As asset prices fall, deflation becomes the real problem, not inflation. Now that the ECB is starting to increase its balance sheet ($2.7 trillion) and at the same time reduce interest rates, the Armageddon trade is dead and gold and silver are deflating even further.

That said, there will be tradable oversold bounces in these over-loved instruments and this week they are on the short-term buy list.