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."