Gold and silver prices finished yesterday with sharp rises, but will this trend continue throughout the day? Gold and silver prices are currently traded with mixed trends. Today, the Bank of Japan announced it will keep rate unchanged but expanded its monetary easing plan (USD/JPY reacted and hiked up); ECB will announce its rate decision and US department labor will publish its US unemployment claims for last week.
Let’s examine the precious metals market for today, August 4th:
Gold and silver prices –August
Gold price inclined again yesterday by 1.33% and reached $1,666. Silver price also inclined by 4.16% to $41.76. During August, gold price increased by 2.2%, and silver price rose by 4.1%.
The chart below shows the normalized gold and silver prices (July 12th 2011=100). As seen below, gold and silver prices rose very sharply during August. The last time there was such a sharp increase was back in July 12th.
The gold to silver ratio: the ratio between gold and silver prices starts to change direction and fell below the 40 mark, but its still near the ratio range it used to be in the past several weeks. During August silver price has outperformed gold price as the ratio fell by 1.9%.
BOJ expanded monetary policy
The Bank of Japan announced it will keep the overnight rate at 1 to 0.1 percent; it also announced to enhance the monetary easing plan, i.e. increasing the total asset purchasing program, by adding an additional 10 trillion yen (roughly $126 billion) to the plan from 40 trillion yen to 50 trillion yen. This means that the BOJ will further “print Yen” which will reduce its value compared to other major currencies including US dollar. This news had an immediate reaction in the forex market as the USD to Yen exchange rate rose very sharply; its currently traded at 79.7838 as of 10:21 (GMT) which is an increase of 3.5342%. This shift is likely to further strengthen the US dollar against other currencies and might also have a negative effect on gold and silver prices, as it might curb the recent rally of gold and silver prices.
ECB rate decision
Today, the European Central Bank President, Jean Claude Trichet, will announce the rate decision for the month of August. The rate is currently at 1.5% after the ECB raised the rate last month by 0.25%; currently the Euros to US dollar is traded down, partly due to announced of BOJ to expand its asset purchasing plan; since the Euro Area inflation reached in July 2.5% which is a decrease from 2.7% during June; its likely that Trichet will keep the rate unchanged.
If, however Trichet will raise the ECB rate, this decision is expected to have lagged negative effect on gold price, even when controlling for the effect it will have on USD; according to Roache et. al (2008)* there is a negative correlation between ECB rate decision and gold price; as the ECB rate rises, gold price falls the following day; in the recent rate raise back in July 7th, gold price inclined the next day.
*These correlations are based on the research done by Roache et. al (2008) in the paper named “the effects of economic news on commodity prices: is gold just another commodity?”
US Dollar / Gold & silver prices – August update
The Euro to US dollar exchange rate inclined yesterday by 0.84%; the US dollar also depreciated against other currencies including the AUD and YEN. As stated above, this direction is likely to shift as the Yen is strongly being traded down against the US dollar; also since the expectations are that Trichet won’t raise the Euro interest rate, then its likely that the US dollar will continue to appreciate during the day, which might shift the direction of the recent rally of gold and silver prices. On the other hand, the weak correlations of gold and silver prices with major currencies during July might suggest that this recent news from Japan will have, at best, a short term effect on gold and silver prices.
Current Gold and Silver prices
The precious metals prices are currently traded down in the European market:
The current gold price short term future (September 2011 delivery) is traded at $1,665.5 per t oz. a $0.8 or 0.05% decrease as of 10:44*.
Current silver price, short term futures is at $41.605 per t oz – a $0.153 or 0.37%, decline as of 10:45*.
The current ratio of gold to silver prices is at 40.01.
Gold and silver prices Outlook:
Gold and silver prices rose very sharply in the past couple of days but they are currently traded down, due, in part to the recent news from Japan of expanding quantitative easing plan; even if the ECB rate will remain unchanged, it seems that the recent news from Japan will continue to curb the rally of gold and silver prices during the day; this effect, however is likely to dissipate very soon and afterwards the rally of gold and silver prices are likely to resume..
Here is a reminder of the top events and reports that are planed for today and tomorrow (all times GMT):
Tentative – Bank of Japan – rate decision and monetary policy statement
13:30 – ECB conference Trichet speaks and Euro rate decision
13:30 – Department of Labor report – U.S. unemployment claims
15:30 – EIA report about Natural gas storage
12:00 – Canada unemployment rate and employment report
13.30 – Canada building permits
13.30 – U.S. unemployment rate report & non-farm employment change
For further reading:
Lior Cohen, M.A. commodities analyst and blogger at Trading NRG.