5/14/2012
By David Urani, Research Analyst

Once again belongs to the Three Stooges of Europe (Greece, Spain and Italy). With all of the conflict going on in the Greek government, it was only natural that sovereign bond investors would get nervous. Consequentially Italian and Spanish auctions went poorly as risk premiums shot higher. The Spanish 10-year yield is signaling danger, up 22 basis points to 6.23%, which is the highest since last November. Italy's yields are up 19 basis points, although they remain below the year-to-date highs.

For me, all of these problems in Europe bring up a bit of a conundrum in gold and the dollar. Naturally, the euro has taken a shellacking and as a result the dollar has seen a big upswing.

                           Dollar to Euro

The higher dollar, along with the economic implications of a hurting Europe, has subsequently hit commodities. Gold in particular has lost 6% just this month. Yet, as a safety asset one would think the allure of gold would be strong at the moment, especially with the euro currency under increasing doubt. We know with certainty that people want to flock to safety, because US 10-year treasuries are trading around record low yields so the potential for gold to make a turnaround is there if it weren't for the rise of the dollar.

                            Gold

It seems natural that investors would run to America, because believe it or not we're just about the best country to turn to if you're looking for a safety net right now. In that sense, the dollar continues to be supported. But there's one guy who can change that, and that's Ben Bernanke of course. You know he sees all that's going on in Europe and a couple of recent data points suggest the pain overseas is starting to affect us here at home. In the meantime, inflation looks like less of an issue with oil prices having gone from above $105 to start the month to below $95 currently.

So that means the chances of more QE are rising. Surely the crowds will start speculating on more Fed stimulus any minute now. In that case, look out for the dollar to make a reversal and for gold to follow suit, especially if QE does indeed happen.

David Urani
Wall Street Strategies