“Italy’s public finances are sound; we are not among the countries at risk.”

Luigi Casero, Italian Treasury Undersecretary

The above quote was taken yesterday in Rome and was meant to deflect speculators from attacking Italian government bond markets. Unfortunately for Italy, a similar pronouncement was made in 1992 just ahead of that country’s humiliating devaluation and exit from the European Exchange Rate Mechanism (ERM), the euro’s predecessor. Just days later, the Italians devalued the lira by 17% and left the ERM grid.

A similar outcome is growing in late 2010 as the EUR increasingly diverges between the “haves” and the “have nots.” The haves include Germany, which seems to be in a bizarre economic boom, while the have not periphery is suffocating with high rates and growing deflation caused by deep spending cuts.

Politicians usually hide the truth from the public. No surprise there. They also have a knack for publicly defending a policy just before they change their position and surprise everyone.

Another example of financial market distortion was Treasury’s vocal support of a “strong dollar” for many years under the second Bush administration and, recently, under Treasury Secretary, Tim Geithner. We all know better. If you’re going to grow inflation, which is what “bubble” Ben Bernanke desperately wants, then a weaker dollar serves as a primary role in that objective.

The euro’s bounce today provides an opportunity to “get out of Dodge” while the getting is still good. If I held EUR, I’d be looking to sell it on any rally and accumulate gold and the Swiss franc.

The single European currency breached its 200-day moving average on Tuesday as it fell to a 10-week low of 1.2969 before recovering to trade above 1.30 to the dollar. I doubt she’ll hold above 1.30 for very long.

For the first time since the European credit crisis sparked waves of selling across world markets last January, the infection plaguing the bloc is spreading. Credits such as Italy and Belgium are now witnessing higher spreads compared to German bunds or government bonds – a bad omen.

It’s only a matter of time until the European Central Bank (ECB) announces a broad-based quantitative easing program of its own. The markets want much more money thrown at the sovereign debt problem and they’re going to get just that. I suspect this will set the stage for the next powerful rise in gold prices as investors kiss “au revoir” to EUR price stability.