All eyes are towards Wall Street over the markets’ reaction to the weekend news of Standard and Poor’s downgrading the US credit rating; ECB signaled yesterday it will purchase Italian and Spanish bonds in an attempt to cool down the markets. Today, the Chinese inflation rate for July will be published.
Let’s examine the precious metals market for today, August 8th:
Gold and silver prices –August
Gold price fell again on Friday by 0.43% and reached $1,651. Silver price sharply declined by 3.09% to $38.21.
During August, gold price increased by 1.3%, and silver price fell by 4.7%.
The chart below shows the normalized gold and silver prices (July 12th 2011=100). As seen below, gold and silver prices rose very rapidly during the first few days in August, but then they have changed direction and declined in the last couple of days.
The gold to silver ratio: the ratio between gold and silver prices starts changes direction again and rose very sharply in the last couple of days up to 43.23 as silver price fell very sharply. During August gold price has outperformed silver price as the ratio inclined by 6.3%.
Despite the sharp shifts in silver price, the relation between gold and silver prices is still strong as the linear correlation of the two prices is still very strong in August. According to the chart below, the linear correlation of the daily percent changes between gold and silver during August is 0.902.
S&P downgrade ramifications
The rumors of Standard and Poor’s downgrading the US credit rating from AAA to +AA eventually came true as S&P announced it over the weekend. The rumors that floated during last week are probably among the reasons for the sharp falls in Major Stock Markets during the second half of last week. This suggests that there will likely to be a negative reaction to the markets. Gold and silver will probably play the safe heaven card and the demand for them will rise resulting in price hikes during the day.
S&P also kept a “negative” outlook on US credit rating, and claimed it may further downgrade the US credit rating again within the next couple of years from +AA to AA.
The US Treasury Department already attacked the S&P decision to downgrade and pointed out to the mistake S&P made in its projected US government debt of $2 trillion over 10 years; this means the US public debt projection is more stabile than S&P had initially calculated.
Italian and Spanish bond problems
The debt crisis in Europe continues to spread and recently it came to Italy’s doorstep. Yesterday, the European Central Bank’s President Jean- Claude Trichet signaled he is willing to purchase Italian and Spanish bonds in an attempt to curb the market instability, after they had failed to sell its bonds. In return, Berlusconi pledged to make drastic cuts to the Italian government budget. The Euro to US dollar already started the market trading on a rise. This news might have curbed some of the gains in gold and silver prices had it not reacted so dramatically to the news of the S&P downgrade.
US Dollar / Gold & silver prices – August update
The Euro to US dollar exchange rate sharply inclined on Friday by 1.34%; the US dollar also depreciated against other currencies including the YEN. If the US dollar will continue to depreciate during the day, this might continue to affect the recent rally of gold and silver prices. During August there has been a strong correlation between bullion prices and Euro to US dollar, USD/CAD and USD/YEN. These correlations, however should be taken with a grain of salts as they are not significant (due to very few samples).
Current Gold and Silver prices
The precious metals prices are currently traded sharply up in the European market:
The current gold price short term future (September 2011 delivery) is traded at $1,713.0 per t oz. a $61.2 or 3.71% increase as of 07:06*.
Current silver price, short term futures is at $39.950 per t oz – a $1.739 or 4.55%, incline as of 07:06*.
The current ratio of gold to silver prices is at 42.87.
Gold and silver prices Outlook:
Gold and silver prices started the week with very sharp gains after they had declined in the past couple of business days. The news of the US downgrade will probably push traders from US Treasury bills towards gold and silver; the Federal Reserve meeting tomorrow will also be among the factors that could raise the level of anxiety in the markets that will benefit gold and silver traders; this trend however is likely to dissipate very in the next few days and then gold and silver prices will stabilize and resume their slower upward trend.
Here is a reminder of the top events and reports that are planed for today and tomorrow (all times GMT):
3.00 – Chinese CPI
OPEC monthly report
13:15 – Canadian Housing Starts
17:30 – Decision on Federal Reverse’s Interest Rate
For further reading:
Lior Cohen, M.A. commodities analyst and blogger at Trading NRG.