Crude oil is trading above $85/b today, the dollar is strengthening against the euro, and gold futures are above $1,180/oz. That all three things are happening at the same time is a bit unusual, but then these are unusual times. Both the SPDR Gold Shares ETF (NYSE:GLD) and the Market Vectors Gold Miners ETF (NYSE:GDX) are at new highs for 2010 and at their highest point since gold topped $1,200/oz back in December 2009. The climb back to the peak has been more or less steady, and if news from Europe doesn’t get better over the weekend, $1,200/oz is not out of the question for next week.

What’s odd about the rising price of oil and gold, coupled with the stronger dollar, is that for some time now oil has dipped as the dollar gathered strength. But US unemployment numbers released yesterday and the announced first quarter US GDP growth of 3.2% have put some spine back in the dollar even as oil rises on the assumption that demand will grow as the economy continues to grow.

The depressing news about Greek debt is the principal driver in the rising price of gold. The dollar rally against the euro has cooled off somewhat on the hope that the EU, and particularly Germany, will ride to Greece’s rescue. Without such a rescue, Greece’s economic woes are very likely to taint Portugal and Spain even more, sending more investors into the gold market.

The Greek government is expected to announce a deal with the IMF and the EU this weekend that will include austerity measures that are deflationary to the point of being harsh. Greece will have to agree to cut $30 billion from its budget, attacking everything from pension funds to wage cuts. The Wall Street Journal also reports that civil service bonuses worth about $1.8 billion will also be cut and that the top rate of Greece’s VAT will go from 21% to 23%-24%.

Greek workers have already taken to the streets, and unions have sworn to resist further cuts in government spending and entitlement pays. More fighting in the streets will not soothe investors, and that could accelerate the flight to gold.

The IMF’s managing director has been quoted as saying the full bailout package for Greece could total as much as $156 billion over the next three years. That figure, as large as it is, isn’t soothing investors much either.

US investors have been piling into gold as well. GLD’s bullion holdings hit a record 1,159 metric tons as of yesterday, a rise of more than 6 metric tons from a day earlier. The fear that the Greek contagion will spread to other parts of Europe has given even US investors the jitters.

The Greek debt problem also threatens the stability of the European monetary union, and ultimately the euro itself. As New York Times columnist Paul Krugman points out today, faced with enough internal pressure over draconian IMF measures may cause the Greek government to abandon the euro because the value of the currency cannot be easily adjusted. Germany would have to agree to accepting some inflation and the Greeks to accepting some deflation. Germany will have none of inflation, so Greece must absorb the devaluation all alone. The country may not recover from this for years.

As Krugman points out, from Greece’s point of view if it is forced into default what difference does it make if the subsequent bank run is caused by leaving the euro or not. The bailout package being proposed today could avoid that, but the politics of the situation are more important than the economics.

Gold prices, for now at least, look set to rise and fall on the situation in Europe. If the agreement between the EU, the IMF, and Greece is announced and if Greek citizens can be persuaded to accept the inevitable, demand for gold will soften. But those conditions are not sure things, and that is what is moving gold prices higher.

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