Gold futures leaped during early morning trade Monday, as news that Spain would receive a bailout of up to EUR100bn in order to save its failing banking sector reached investors’ ears. The bailout news weighed heavy on the dollar – sending the precious commodity up by as much as 0.75 percent to trade at a two-day high of USD1,609.25 a troy ounce.

News of the bailout has also provided global stock markets with a sizeable lift, with shares in London and major European markets jumping as trading opened. The euro climbed to a three-week high at $1.2630 while the GBP/USD soared to 1.5574 during European morning trade, the pair’s highest since Thursday; the pair subsequently consolidated at 1.5539, still up 0.43 percent on the day.

Simon Denham (pictured), MD of Capital Spreads, commented: “A stronger US dollar sent gold prices tumbling on Friday but expectations of a rescue package to bailout Spain’s struggling banks overturned that.  It was again gold buying as an alternative asset considering the plan for extra monetary easing.

“In addition, gold opened higher last night after Spain requested an aid of 100 billion euro, showing its willingness (and Europe’s as a whole) to tackle the debt burden.”

USD down

But while many currencies made gains across the weekend, the bailout move weighed heavily on the USD on live forex charts, with investors abandoning the greenback in favour of riskier assets. The dollar index, which tracks the performance of the greenback against a basket of six other major currencies, was down 0.7 percent to trade at 82.33 Monday morning.

Settling back into its traditional trading relationship, gold rose on the weaker dollar having boosted the precious metal’s appeal as an alternative asset. Despite often being viewed as a tasty alternative for traders during times of economic uncertainty; the recent euro zone problems have done little to attract investors towards the yellow brick. Instead, gold has moved with riskier assets after hitting a record high of USD 1.920 last September.

Welcome relief – but for how long?

FinMins from across the euro zone have welcomed the move with open arms, emphasising the importance of a sum which covers capital requirements but also encompasses an “additional safety margin”.

But despite the lift the bailout has provided to global markets, many traders remain cautious about the long-term prospects for a region which has yet to prove itself. Even Spanish Prime Minister Mariano Rajoy spoke reservedly on the subject of a Spanish recovery, warning against any expectation of a quick turnaround following the banking rescue. Speaking of the package offered – which is estimated to be 2.7 times the funds deemed necessary for Spanish banks by the International Monetary Fund (IMF) – Simon Smith, chief economist at foreign exchange broker FxPro, said: “It all comes down to size and whether this is enough to stem the tide of fear, but does not stoke it further".

Saturday’s bailout action made Spain the fourth euro zone nation to receive international financial assistance from, and investor fear still lingers over the long-term potential for recovery. Michael Hewson, senior market analyst at CMC Markets UK, said the market rally "is likely to be no more than a relief pop", speaking of the “number of unanswered questions” which remain. Where, for example, will the money come from? The options appear to be the soon-to-be-retired EFSF or the new European Stability Mechanism which will only come into operation in July. The specific sum of the bailout is yet to be announced (June 21st is the earmarked date), while terms and conditions – including the lending rate – are also yet to be announced.

"This will be important given that if the money comes from the (ESM) any creditors will have preferred status which will subordinate existing bond holders and thus have the unintended effect of making Spain's funding difficulties much worse” Hewson said. “Investors will be reluctant to expose themselves to the added risk of finding themselves at the back of the queue, in the event of a potential future restructuring if Spain's problems get worse with a deteriorating economic outlook."

Greek polls

With the Greeks trudging back to polling stations in Sunday, and so many questions remaining over the detail of the Spanish bailout, the crisis in the euro zone is far from reaching a satisfactory resolution.

Some economists at top forex brokers are currently predicting a 3-4 percent lending rate attached to the bailout sum. But with three other nations having already received significant sums from of euro zone bailout cash, it is feared that a friendlier lending rate could set a dangerous precedent and/or prompt a demand for renegotiations from either Greece, Ireland or Portugal.

Sarah Cox, Staff Writer