Golden touch as the markets shy from euro debt instability

FOLLOWING the news of spiking Irish and Greek bond yields there are growing fears that at least some periphery Eurozone countries will have to restructure their debt. Spread betters looking to take a position on the fortunes of Ireland and Greece, as well as their fellow periphery nations, should look to gold as an (inverse) proxy for the European sovereign debt market.

With such shakiness in the sovereign sphere – combined with continuing weakness in the US dollar and rising inflationary pressures – gold and silver have been driven to new highs. On Friday, gold hit an all time record of $1,480 and silver a 31 year high above $42. Their continued safe haven and inflation hedge position should see them continuing to rise – it is a spectacle that would have delighted Auric Goldfinger, the bombastic megalomaniac character (pictured) in the eponymous James Bond film.

Last week saw Moody’s Ireland sovereign debt rating cut another two notches to Baa3, while the ratings agency maintained its outlook as negative. With this just one notch above junk status, Ireland will be nervously eyeing the outcome of the solvency tests, required by the European Stabilisation Mechanism for any future bail out.

The request for a bailout from Portugal at least ended the uncertainty of when they would crack, but attention has now been turned to the other Mediterranean economies. Greek bond yields rose to 13.2 per cent and 10 year Spanish bonds underperformed as investors took profit from last month’s rally ahead of next week’s bond auction. According to Alejandro Zambrano, market strategist at FXCM, we will see liquidity premiums in the coming weeks in the periphery Eurozone debt market: “Italian and Spanish yields continue to widen against German yields, which is weighing on the euro. We now expect the Spanish government to pay a premium of 181 basis points from Friday’s 141 within a few weeks. We expect the Italian government to pay a premium of 150 basis points compared with the current 110 – if we are right in our forecasts about the Italian yields, then the premium will have tripled.”

European sovereign debt fears are unlikely to disappear at any point soon and gold will retain its status as a haven commodity.

Spread betters should continue to use gold and silver to take a position on the fortunes of the European sovereign debt market.