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Gold Market Prices Regain $1600, Italy "May Also Need Bailout", Argentina Planning to Change Dollar Debts to Pesos

Bullion prices on the wholesale Gold Market rallied back above $1600 per ounce shortly before Tuesday's US trading, having failed to breach that level in the earlier Asian session, while European stock markets also ticked higher after a quiet morning's trading.

A day earlier, gold briefly rose above $1600 on Monday following the news that Spain will borrow up to €100 billion to rescue its banks, but along with stocks and the Euro gold failed to hold those gains.

Silver Prices meantime jumped to $28.94 per ounce, a 1.5% gain on the week so far, while commodity prices reversed earlier losses.

Earlier on Tuesday, Indian dealers reported flat trading, with one citing traditional gold buyers' lack of spare cash.

"Farmers are not buying as it is their sowing time," said Ketan Shroff, director at Pushpak Bullion, speaking to news agency Reuters.

Away from the Gold Market, Spanish 10-Year government bond yields rose to their highest level this month Tuesday morning, breaching 6.6%.

"There's a risk that Spain may be downgraded," reckons Alessandro Giansanti, senior rates strategist at ING in Amsterdam.

"There are still concerns about the seniority of the outstanding government debt after the bailout, and that means if you want to invest in the bond you need a higher risk premium to compensate."

Ratings agency Moody's last week set out a case for a possible Spanish downgrade as a result of any bailout, citing the experience of private sector bondholders who were obliged to take losses in Greece's debt restructuring in March.

"The debts of Euro area sovereigns that are dependent upon funding support from official sources represent noninvestment grade risks," said a Moody's statement released Friday, the day before it was confirmed Spain would seek a rescue deal for its banks.

"Future support – particularly if likely to be needed for a sustained period – would likely be made conditional on loss sharing with private investors or in extremis withdrawn altogether."

Elsewhere in Europe, yields on Italian 10-Year bonds hit five-month highs this morning.

"It may be that, given the high rates Italy pays to refinance on markets, they too will need support," said Austrian finance minister Maria Fekter Monday night, although by Tuesday morning Fekter said she sees no sign that Italy will make a bailout request.

Every country in the European Union should agree to have their large banks supervised by a single cross-border supervisor, according to European Commission president Jose Manuel Barroso.

"There is now a much clearer awareness among European member states about the need to go further in terms of integration," said Barroso Monday, in an interview with the Financial Times.

The Commission last week published plans for a so-called banking union, which would include pan-European deposit insurance, funded by participating banks, as well as greater supervision of banks across the 27-member EU. 

Britain's chancellor George Osborne however has said the UK will not be part of such an arrangement, while Germany's central bank has also expressed opposition to the idea.

On the currency markets, the Euro hovered around $1.25 Tuesday morning, 1.7% up on the two-year low hit at the start of the month.

The Gold Price in Euros meantime spiked to €41,249 per kilo (€1283 per ounce), 0.8% up on where they started the week.

"Gold is going up, down or sideways dependent on what is going on in the Euro/Dollar rate," reckons Nic Brown, head of commodities research at investment bank Natixis.

In Buenos Aires meantime Argentina's president Cristina Kirchner has submitted draft legislation to enable US Dollar-denominated debts to be paid in Pesos, the Wall Street Journal reports. 

"There is a lot of speculation about supposed plans to 'Pesofy' the economy," says one Buenos Aires-based trader.

It is not clear whether the proposed legislation will be applied retroactively, or if it will apply to government debt. In August, Argentina is due to make a $2.2 billion payment on so-called Boden bonds, which were issued as part of its 2002 debt restructuring.

An unofficial exchange rate for so-called 'Blue Dollars' has emerged in Argentina. The government's interior minister warned last week that discussing the unofficial rate was "an illegal act".

Kirchner's bill carries echoes of a move by Vietnam's central bank last month to restrict lending in currencies other than the Dong. Vietnam, another country whose economy has seen so-called 'Dollarization', has also introduced various laws aimed at regulating its domestic Gold Market, including banning the use of gold as money.

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