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Europe's 'relief rally' wanes -- and gold hits a new high

May 11, 2010 | 11:24 am

Markets’ relief over the European Union rescue plan for the continent’s weakest states faded somewhat on Tuesday, leaving European stock markets -- and the euro -- mostly lower.

Meanwhile, gold had a big day: It jumped to a record closing high, topping $1,219 an ounce, as some investors and traders continued to flock to the metal as an alternative to paper currencies, particularly the euro.

The bailout package, which offered nearly $1 trillion in loans for debt-ridden European countries over three years if they can’t get better funding from the bond market, triggered a huge rebound Monday in battered European stock and bond markets.

The good news Tuesday was that market interest rates continued to fall on government bonds of Greece and Portugal, the two countries considered to be most likely to tap bailout loans. Greece’s two-year note yield slipped to 7.02% from 7.53% on Monday. The yield had rocketed to 18.27% on Friday.

Goldbarss Portugal’s two-year note yield fell to 2.26% Tuesday from 2.95% on Monday and 6.05% on Friday.

In tandem with the rescue package, the European Central Bank on Monday began buying bonds of euro-zone countries for its own account, a move aimed at pushing bond yields down.

European stock markets, however, gave back some of Monday’s gains. The Spanish market fell 3.3% after rocketing 14.4% on Monday. The French market eased 0.7% after soaring 9.7% on Monday.

A lack of confidence in the rescue package -- or maybe fear of intended or unintended consequences from the plan -- has shown up most clearly in continued downward pressure on the euro.

The currency rose as high as $1.309 on Monday from $1.276 on Friday as money flooded back into European financial markets. But it fell back to $1.28 by Monday’s close in New York and on Tuesday lost more ground, to $1.273 by about 11 a.m. PDT.

What’s bad for the euro is great for gold: Near-term gold futures in New York jumped $19.50 to end Tuesday's session at $1,219.90 an ounce, an all-time closing high. That topped the previous record closing high of $1,217.40 reached on Dec. 3. The metal, up 11% year to date, continued to soar in electronic trading late Tuesday, reaching $1,232 an ounce.

Gold often surges when people are fleeing most other markets in fear. That happened during last Thursday’s wild trading on Wall Street. But now gold is hitting a new high even as U.S. stocks are rallying and as the dollar, the metal’s archrival, rises against the euro.

“I think it shows you this is more than just a ‘flight-to-quality’ move,” said Adam Klopfenstein, a market strategist at commodities trading firm Lind-Waldock in Chicago. “You’ve got more than one camp that wants to buy gold now.”

-- Tom Petruno

Photo: Frantzesco Kangaris / Bloomberg News