Worryingly for Europe's leaders it looks like last week's debt deal for Greece may not have placated the markets, and Italian and Spanish bond yields continue to rise.

This has supported the gold price. As you can see below, gold (white line) is moving with the Italian- German 10-year bond spread (orange line) and the Spanish-German bond spread (yellow line).

Bond spreads have started to widen again due to two factors in our view, 1, Europe's credit markets are moving with risk appetite, which has been dented by the on-going impasse over the US debt ceiling. 2, Investors are re-assessing the outcome of last week's EU summit. The EFSF fund needs to be enlarged to cover the shirts of Italy and Spain, without this there will be continued contagion fears.

Interestingly, the gold price continued to move higher last week even after a deal was reached in Brussels on Thursday. Interestingly, since the start of July, Italian bond yields have a stronger correlation with gold than the dollar does with the yellow metal, at 51.8%, with the gold price moving with the dollar index 42.1% of the time. We need to see if this relationship will hold, but if pressures in Europe remain (especially in Spain and Italy) then gold may benefit.

Levels on the upside include $1,630 and $1,650. Short-term support lies at $1,616 pivot then $1,610 and $1,604.


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Best Regards,

Kathleen Brooks| Research Director UK EMEA | FOREX.com

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