The trends that drove gold prices higher in 2010 are still in place. In the U.S., the Federal Reserve is buying $600 billion in treasuries in an attempt to keep interest rates low. Low interest rates encourage higher gold prices.

In Europe, the situation is still unstable. The European Central Bank (ECB) has stepped up its purchases of member nations' bonds. Spain is still on the table as a country teetering on verge of a bailout. Until the European mess is settled, gold remains a surrogate currency.

The economic news out of Europe has strengthened the dollar and recast doubt on the euro. The demise of the Irish "domino" after the bailout of the Greek domino has formed clouds over the Portuguese and Spanish dominoes.

As fear grows, the European Bank is trying to build a buttress to hold up the dominoes. However, from the perspective of the Greek and Irish people the prescribed austerity measures employed is just foreign oppression and will not help their employment levels.

What this means to most investors is to run for the hills. What it means to this investor is watch closely for buying opportunities because bargains will be created by the fear -- for sure!

The euro was supposed to be a juggernaut -- a way to provide for European global dominance. Well, it seems like it has become a tremendous liability -- with several bailouts of weak countries.

The latest, of course, came over the weekend. Europe put together an 85 billion euro bailout package for Ireland. The hope was that it would calm markets.

But can a bailout really be assuring? Not for investors, as world markets have swooned again. Traders are dumping bonds and moving into the US dollar. Ironic, huh?

Just when fears of a eurozone collapse faded from the front page, the news of an Irish bank bailout and of Spain's credit rating downgrade reignited investor concerns, CNN Money reports.

Ireland's central bank had to bail out its Anglo Irish Bank to the tune of $40 billion. The bailout raises its staggering deficit from 11.75% to 32% in 2010, ten times higher that the European Union's guidelines. "We hope to bring closure to this matter and that is what we have done today," Finance Minister, Brian Lenhan said, Reuters reported. "Yes, of course these figures are horrendous but they can be managed over 10 years."

American International Group, Inc. (AIG) announced a plan to repay all its obligations to American taxpayers. AIG shares closed up $1.65 to $39.10. Overall option implied volatility of 42 is below its 26-week average of 50, according to Track Data, suggesting decreasing price movement.

Spain's credit rating was lowered one level by Moody's on a weak economic outlook. The IBEX 35 Index is recently down 0.03%. MSCI Spain Index ETF (EWP) overall option implied volatility of 29 is below its 26-week average of 35 according to Track Data, suggesting decreasing price movement.

EnCana (ECA) October volume and volatility spiked in the last hour of trading as shares rallied 6%.

Options Update is by Stock Specialist Paul Foster of theflyonthewall.com.

So you thought the sovereign debt crisis in Europe was over? Wrong. For the past two months we've had a temporary respite. The euro rose and we got a nice warm and fuzzy feeling. But now the problem is back.

According to Bloomberg Markets Magazine's October issue, even though Europe did stress tests on their banks, there is still concern that one or more countries could default. Banks hold sovereign debt bonds from many different countries. That is putting pressure on all eurozone banks.

A default by Greece could trigger the collapse of banks with large holdings of Greek debt. Europe's largest banks hold €134 billion in Greek, Portuguese and Spanish government bonds.

After the lunch hour Fitch downgraded Spain's credit rating to AA+ from AAA. The euro immediately sold down to $1.229. And, the stock markets in the US swiftly sold off prior to the Memorial Day weekend, leaving investors to think about the bad news for three days. A nice way to ruin the holiday.

The initial reaction to the news was that the major indexes dropped 1.2%. By 3.30 PM the DJIA had recovered most of its equilibrium and was off .5% on small volume. Spain recently said that it would miss GDP estimates for 2011, so Wall St. may have anticipated the possibility of a ratings agency decision. Long weekends after bad news can be a time of quiet panic for traders. The beer might not taste as cool as it could have.

The unofficial closing bell numbers:

Dow 10,136.63 -122.36 (-1.19%)
S&P 500 1,089.41 -13.65 (-1.24%)
Nasdaq 2,257.04 -20.64 (-0.91%)

If you believe the economic recovery is just beginning, then the sell-off this week was a welcome opportunity. If you bought any stocks two weeks ago, you were hurting, but if you were looking to buy, opportunity was at the front door. Will the rally that started last July when the DJIA traded at 8058 continue? Or is this the apex, having touched 11,309 (up 40% in less than a year), and the only direction is down? I don't think so. Here's why.

The U.S. economy is recovering. All the data from manufacturing to housing sales, even employment (224,000 non-farm workers were added in April, 290,000 total workers found new jobs), show improvement.

Car sales were up 25% for most automakers in the month of April compared to last year's April. Factory orders rose 1.3% in March, helped by higher demand for machinery, appliances, and primary metals. Analysts thought the number would be negative .1%. Pending home sales rose a seasonally-adjusted 5.3% in March. Again, analysts thought the number would be 4%. Pending home sales for the year to date are now up 21.1% from a year ago.

In an unexpected move, German chancellor, Angela Merkel, called for the "orderly insolvencies" of member states.

Germany says it wants to get tough on European Union members to prevent another Greek crisis. Germany has been against helping Greece, and only under pressure from the EU and the IMF did it agree to participate in the bailout.

Now, the Germans want to let member states default to avoid any repeat of the Greek crisis. What they fail to realize is that defaults are often messy and not orderly. What could happen is that confidence in the eurozone would disappear as would the euro.

When the financial meltdown struck in the United States in 2008, the contagion quickly spread throughout the world, including the European Union (EU). However, unlike the Federal Reserve, which has unilateral authority to act on behalf of the United States, the EU has no such authority.

The EU barely survived 2008 and 2009. Then this year, Greece had difficulty refinancing its sovereign debt. Again, unlike the United States, where the debt came from financial institutions, in Greece the debt is government debt.

A day after signaling rigorous scrutiny of Greece's austerity plan, German Chancellor Angela Merkel did an about-face, of sorts, Wednesday, vowing a quicker approval of aid to the deficit-plague euro-zone country. Not before, however, the chancellor's earlier remarks rattled bond, currency and stock markets around the globe.

Standing beside International Monetary Fund Managing Director Dominique Strauss-Kahn, Merkel said, "It's completely clear that the negotiations between the Greek government, the European Commission and the IMF need to be sped up now," Bloomberg News reported Wednesday.

During a crisis, never mind what the media or government officials are saying, follow the money.

The Mercantile Exchange (CME) posts open contracts for each currency traded -- both long and short positions. By subtracting them you can get a sense of whether traders are net long or short. In the case of the euro, traders are net short 40,000 contracts or nearly $8 billion.

Meanwhile, officials of struggling countries, Greece, Spain and Portugal are telling the media that they have things under control. Elena Salgado, Spanish finance minister and Jose Manuel Campo, her deputy flew to London to meet with bondholders, the Financial Times reports. They want to reassure promises to cut Spain's budget deficit by 3% of GDP by 2013. But then the treasury wants to raise 116.7 billion euros.

Looking back just a few weeks, the markets ushered in the new year with euphoria. Within a few short weeks, things have turned sour. The Dow dropped below the 10,000 mark last week. S&P 500 is down 7.3% from its 15-month closing peak.

Now the question facing investors and traders is whether the market is in a corrective phase. Eric Kuby of NorthStar Investment Management Group thinks so. "I'm in the camp that believes that we are in a correction," he said.

On Thursday, markets across Europe, Asia and the U.S. sold off sharply. The reason is concern over Greece, Spain and Portugal being unable to manage their sovereign debts. The problem did not vanish overnight. The spread between the Greek and German 10-year government debt expanded since Thursday. Investors and traders sold the euro and bought dollars. Again on Friday, even with the Swiss Central Bank selling its own currency, the euro is still under pressure.

The dollar is strong again Friday, with the U.S. dollar index trading at 80.39, up .315 (8:30 EDT). In contrast, the euro has fallen 1.1% so far this week. This is the fourth consecutive week of losses.

Thinking about diversifying a portion of your portfolio out of the dollar, and in to, perhaps, other hard currencies, such as the euro?

About six months ago, selling dollars and to buy euros appeared to be such a slam-dunk, no-risk investment move. After all, the United States was and will continue to record $1 trillion-plus deficits that are destined to result in further weakening in the dollar in 2010. The dollar will fall, the dollar-bears argue: it's a no-brainer.