Gold slipped below $1150 an ounce on Tuesday morning in London, dropping 0.3% from Monday's finish, as the US Dollar rose and world stock markets fell once again.
"The contagion" of fears about Greek government debt continued "spreading quite rapidly to Portugal, Spain, Ireland and Italy," said one credit strategist after German chancellor Merkel repeated demands for strict budget reductions by Athens.
"This is a consolidation of Europe's walls, the walls of the Euro," complained Italy's foreign minister, Franco Frattini of Germany's stance.
"It's a rescue for all of us."
Gold priced in Euros held in a tight range around €27,800 per kilo – early April's then-record high, which was broken on Monday.
Two-year Greek bond yields rose to 14% this morning, pushing further above "high risk" government debt such as Pakistan's and offering well over 4.5 times' comparable German debt.
US, Japanese, German and UK government all bonds rose, in contrast, pushing 10-year yields down towards 1-month lows.
Asian stock markets fell for the third session in four. Crude oil dropped through $84 per barrel.
"With the financial terms currently on offer," reckons Citigroup's chief economist – former Bank of England policymaker Willem Buiter – a significant haircut for creditors or even a formal default become more likely."
Greek bondholders will likely be forced to accept much longer time-to-maturity, plus a 20% or "worst-case scenario" 30% drop in value, Buiter is quoted by Bloomberg.
"Greece is not an isolated case of budgetary indiscipline and deteriorating competitiveness," writes Standard Bank's chief currency strategist Steve Barrow today.
"Instead, there’s been a symmetric shock – the global credit crunch – which has hit budgets hard throughout the Eurozone...This is likely to drag down other Eurozone economies, other Eurozone bond markets, and the Euro."
Averaging +0.51 since the single currency was launched in Jan. 2000, the correlation between daily Gold Prices and the Euro dropped to zero at the end of last month for the first time since April '09.
The correlation between gold and the Euro would stand at +1.0 if they moved perfectly in lock-step, something they very nearly achieved in 15 of the last 124 months.
It would read –1.0 if they moved in absolute opposition, something approached during the strong US Dollar rallies of Oct. 2005 (–0.85) and Feb. '09 (–083).
"Precious metals are still clinging tenaciously to the heights they recently attained," writes Sean Corrigan at Diapason Commodities in Lausanne, Switzerland, "no more than buffeted, so far, by the stronger US Dollar."
Pointing to a marked deceleration in global money-supply growth – and noting the strong link between money growth and raw-material commodity prices – "All indications are that there is still some headroom in [the Gold and Silver] corner of the market," Corrigan writes, "especially since – for gold at least – extra liquidity inflates prices, while reduced liquidity enhances the insurance premium."
Gold Prices trebled during the global "Reflation Rally" peaking in late 2007. They then rose by one-fifth against the Dollar as world stock markets dropped 60% of their value to March 2009.
"[European central banks] have little appetite for selling gold," notes marketing-group the World Gold Council in its latest central-bank gold reserve update.
Since 27th Sept. last year – when Western Europe's central banks renewed a 5-year deal to cap their joint gold sales, reducing the ceiling to 400 tonnes per year – total only 7.2 tonnes, the vast bulk of it from the International Monetary Fund.
"This leaves the IMF with 185.7 tonnes to be sold in a phased and transparent manner within the ceiling set by the CBGA," says the World Gold Council, "so as to avoid any disruption to the gold market."
Meantime on Tuesday, the British Pound fell sharply against the Dollar as UK mortgage approvals and wholesale trading activity both came in much weaker than expected in new data releases.
London's FTSE100 share index followed a 1.5% drop in mainland European stocks. Gold priced in Sterling recorded its best London Fix in two weeks above £750 an ounce.
Over in the US – where the Federal Reserve began its two-day monetary policy meeting – "The 'extended period' language about rates is likely to stay until later this year," reckons Swiss Re's chief economist Kurt Karl in New York, speaking to Money magazine.
"We're waiting for them to talk about the recovery being self-sustaining," agrees another chief economist, also speaking to Money magazine.
Last month saw Kansas City Fed president Thomas Hoenig vote against keeping the "extended period" phrase for a second time, warning other policy-makers that such language risks "the buildup of financial imbalances" by encouraging the idea that low rates will support asset prices indefinitely.
Hoenig supported keeping short-term Dollar rates at zero, however. Consumer-price inflation in the United States was last pegged at 2.3% per year.