Spot market gold prices dropped back below $1,600 an ounce Monday morning in London, having briefly risen above that level in Asian trading, as stocks and the euro also began the week strongly and US Treasuries fell following news that Spain is to receive a bailout.
Silver prices also jumped as Asian markets opened, before they too traded lower, falling to around $28.70 per ounce ahead of the start of US trading.
Euro gold prices by contrast rallied shortly before US open, climbing to €40,880 per kilo (€1271 per ounce) as the euro gave back most of its early gains against the dollar.
"Gold seems to be primarily tracking one trend, namely the trend in the US dollar," says a note from Citi.
"If an event in Europe causes the US Dollar to weaken, gold is likely to rise. If it causes the US dollar to strengthen, gold will likely fall."
The Eurogroup of single currency finance ministers confirmed Saturday that Spain will ask to borrow up to €100 billion to fund restructuring of its banking sector, ahead of forthcoming stress tests of Spanish financial institutions.
In return, a Eurogroup statement said, Spain should focus on "specific reforms targeting the financial sector". There was, however, no mention of fiscal reforms as a condition of lending, in contrast with the bailouts of Greece, Ireland and Portugal.
"The Eurogroup notes that Spain has already implemented significant fiscal and labor market reforms," the statement said.
"This is pre-emptive action," said Olli Rehn, European commissioner for economic and monetary affairs, speaking on Sunday.
"This is a very clear signal to the markets, to the public, that the euro zone is ready to take determined action."
Yields on 10-Year Spanish government bonds however remained above 6% Monday morning, rising above 6.2% after an initial drop.
"The burden of recapitalizing insolvent banks or loss-making acquisitions of solvent banks will fall on Spanish citizens," says Karl Whelan, economist at University College Dublin.
"This weekend's announcement may well end up shutting Spain out of the sovereign bond market."
Spanish banks have suffered as a result of loans to Spain's property market going bad, and may need to put aside up to €155 billion to cover losses, according to an estimate from analysts at Credit Suisse, who add that a further €94 billion in losses may stem from non-property lending.
"We also know that the Spanish regions are going to need a lot more funding than has been assumed," adds Helen Haworth, London-based head of European interest rate strategy at Credit Suisse.
"There is still no buyer of Spanish debt beyond the domestic investor base, which is basically the Spanish banks."
"The key is to look at the reaction of investors and see if capital flight stops," adds Jose Carlos Diez, economist at research firm Intermoney in Madrid.
"If the process doesn't stop, there will be more funding problems and what we will see is a bailout that is starting small become a big one."
Spain's central bank revealed last month that €97 billion left the country in the first three months of the year.
Elsewhere in Europe, yields on 10-Year Italian government bonds breached 6% Monday morning, higher than where they ended last week.
"The scrutiny of Italy is high and certainly will not dissipate after the deal with Spain," says Nicola Marinelli, portfolio manager at Glendevon King Asset Management in London.
"This bailout does not mean that Italy will be under attack, but it means that investors will pay attention to every bit of information before deciding to buy or to sell Italian bonds."
Both Spain and Italy are guarantors for the lending capacity of the European Financial Stability Facility and European Stability Mechanism, the bailout funds that will fund the Spanish bank rescue package.
Ahead of this weekend's elections, two of Greece's left-of-center parties, Pasok and Democratic Left, have proposed plans that would form the basis of a unity government, reportedly borrowing heavily from the policies of the Coalition of the Radical Left (Syriza).
Syriza, which has expressed opposition to Greece's bailout deal, and the pro-bailout New Democracy party are the two parties currently leading in the polls.
"Investors here want to hold part of their assets in gold to hedge for the risks, especially now that the financial crisis has evolved into a sovereign crisis," says Zheng Zhiguang, general manager at ICBC's precious metals department.
"It's necessary for individual, institutional or even government investors to hold gold when the value of money is decreasing at a time of possible quantitative easing or excessive money-printing practices."
ICBC announced last month that it aims to become Asia's first market maker in London's gold market.
Chinese consumer price inflation meantime eased to 3.0% last month – down from 3.4% a month earlier, according to official data published Saturday. Last year, China's official CPI inflation hit a 2011 high of 6.5% in July.
In New York meantime, the difference between bullish and bearish gold futures and options contracts held by traders on the Comex exchange – the so-called speculative net long – rose 2.8% in the week ended last Tuesday, figures published late Friday by the Commodity Futures Trading Commission show.
"The sharp increase was largely the result of speculative longs being added, with a slight decrease in speculative shorts also contributing to the overall improvement," says Standard Bank commodity strategist Marc Ground.
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