By Melissa Pistilli-Exclusive to Silver Investing News

Currency markets are continuing to influence precious metals prices this week as gold and silver post gains after falling to new lows the past weeks.

On Monday, gold managed to hold the critical $1100 an ounce level and silver traded sideways to close at $15.52 an ounce.

Tuesday, silver and gold jumped as the markets looked forward to a meeting between European leaders to discuss support for debt-burdened Greece. Gold hit as high as $1120 an ounce in late morning trading to close at $1118.80 with silver reaching $16.15 an ounce.

Interestingly, gold hit a record high in Euros above 815 despite a stronger dollar, leading some analysts to conclude that gold may be decoupling from the dollar.

Eurozone Debt Crisis Driving Investors to Seek Shelter in Gold?

Some of the rebound in precious metals prices this week is being attributed to investors seeking safety from the threat to the currency market posed by sovereign debt issues in not only Greece, but Portugal, Spain, Italy and Ireland as well.

“Alongside long-term inflation fears, looming risks in the euro zone are obviously driving investors into gold, with Greece remaining the dominating theme,” said Commerzbank analysts. “Greece’s public-debt crisis, remaining a sword of Damocles, will drive investors to view gold as a safe haven again.”

Brokerage firm GoldCore Ltd is in agreement. “Investors fear a Greek default could spark a wider European debt crisis . . . It is hard to see how gold will not remain in strong demand.”

Precious Metals Prices Decoupling from Dollar?

The dollar has also gained support as traders move out of the euro and into either the perceived safety of the dollar or precious metals. Hence, the dollar and gold have been rising together: a deviation from our general understanding of dollar versus precious metals trends. Exceptions to the rule come into play when fear over financial stability begins to pervade the market place and both become viewed as safe-havens.

“Over the last week or so we’ve had this traditional (link) between the dollar and gold disconnecting, so you have seen the dollar strengthen and gold strengthen,” said Jeremy East, Standard Chartered head of commodity derivatives trading. “The situation in Greece has contributed to that.”

Julian Phillips, with nearly 40 years of global gold and currency market experience, says gold’s inverse correlation with the dollar may soon no longer be the main driver of gold.

According to Phillips, the euro’s weakness shows “capital is fleeing the European currency” and is part of a larger trend involving capital “fleeing from troubled currencies” of which the Yen and the Pound sterling are included. Investors have been turning to the dollar recently “because it is the world’s prime currency and one at the moment less in danger because of this role.” However, he warns that the dollar, too, may soon face the same troubles.

The euro’s current faltering is a sign of things to come and really the canary in the mine as far as the global paper currency system is concerned.

Phillips has argued in the past that the “imminent de-coupling” of gold from the dollar will be precluded by a rise against the euro and the dollar at the same time, as is happening now. A “potentially huge move into gold by the largest institutions and bodies of wealth” will also contribute to gold’s move away from the dollar.

Governments and large institutions are either hoarding their physical gold stocks or buying more. “As a matter of prudence gold is being acquired quietly, but in volume,” he notes.

According to Phillips, “a build-up in both volatility and credibility of the currency system itself” is beginning to manifest in the eurozone. The danger is this could spread to the rest of the world, which could send gold prices to new heights.

There are many analysts who agree with this view. “International financial contagion remains a risk and the cost of insuring sovereign debt is rising for all countries internationally,” say GoldCore analysts. “As long as there remains the risk of the ignition of what is being called the global debt time bomb, it is hard to see how gold will not remain in strong demand.”

In his Tuesday commentary for Kitco, Jon Nadler quotes Dennis Gartman, who concludes that “the world has become disdainful of currencies generally, and is wrapping its collective arms around gold as the most readily available reserve(able) and believable currency.” Perhaps a bit overdone when one considers that physical demand for gold is, according to GoldEssential.com, “dull, with no apparent signs of an immediate pick-up visible.”

While Julian Phillips paints a very bullish picture for precious metals, Nadler, ever the cold bucket of water to the face of gold enthusiasts, brings us down from the clouds with a healthy dose of realism.

Instead of focusing on the roller coaster of “dis-connects and re-connects between gold and various currencies,” Nadler turns our heads to the more “interesting correlation” that exists between gold and the VIX index. He points to a quote from a recent Investors Chronicle report by Chris Dillow: “Since mid-January, stock markets have become noticeably more jittery; not only have prices fallen, but the VIX index – the so-called fear gauge – has risen almost 10 percentage points. If gold were a safe haven, it should have risen. In fact, it’s lost $50 an ounce.”

While the correlation between gold price movements and the FEAR gauge is positive, it is also rather low (0.2), which means that gold price movements are hardly an indicator of fear in the market place the way most gold bugs would like to believe. So, if central banks around the world move to tighten their monetary policy, which Phillips sees as inevitable, precious metals may or may not benefit as safe haven assets, but gold and silver could also fall dramatically on “fears of a double-dip recession.”

Despite their more bearish tone, both Nadler and Dillow concede that gold still “has a valid place in one’s basket of assets,” perhaps not as the ultimate safe haven or an alternative to paper currency, but rather as “plain-vanilla insurance.”

Silver Forecast Still Positive

Lloyds Asset Management puts silver above $17.40 by May and says the price could test March 2008 highs this year. “If our May expectations are met, watch for silver to take another run at historical levels of almost $22 per ounce,” says an optimistic James Burbage, Lloyds CEO. “If $22 is breached in 2010, watch out! I could see silver trading as high as $28 to $30 within just days of a historical high price breach.”