The stock markets took a plunge yesterday over the decision of the rating agency Standard and Poor’s to downgrade the US credit rating; Wall Street is currently showing some signs of recovery as a correction to yestreday’s falls. President Obama’s attempt to stabilize the markets didn’t by addressing the recent S&P’s decision didn’t stop the sharp falls in the markets. Gold price reached news highs and is likely to continue the sharp rises during the day. Today, the Federal Reserve will meet to decide on the interest rate; Canadian housing starts stats will be published. Currently, gold price is up and silver price is traded down.
Let’s examine the precious metals market for today, August 9th:
Gold and silver prices –August
Gold price sharply inclined yesterday by 3.72% and reached a new high of $1,713; this was the sharpest daily percent increase gold price had in 2011; the second largest gain in a single day for gold price was back in July 5th as it rose by 2.03%. Silver price sharply inclined by 3.06% to $39.38. During August, gold price increased by 5%, but silver price fell by 1.8%.
The chart below shows the normalized gold and silver prices (July 29th 2011=100). As seen below, gold price rose very rapidly during most of the August so far; on the other hand, silver price erased most of its gains the end of last week so that eventually it didn’t reach a new high this month (yet).
The gold to silver ratio: the ratio between gold and silver prices kept on rising in the last few days up to 43.50 on Monday, August 9th as gold price rose by a much sharper rate than silver price did. During August gold price has outperformed silver price as the ratio inclined by 7%.
Federal Reserve rate decision
Today the Federal Reserve will decide on the basic interest rate decision and the Bank’s monetary policy. Due to the recent downgrade of the US credit rating, it’s becoming less likely for the Fed to raise interest rates or to announce the implementation of QE3; since the markets are pulling funds from the US economy and stock markets, raising rates will be equivalent to adding gas to an open fire: it will just further pull money from the stock markets. Therefore, it’s more likely that Bernanke will try to calm the markets, reassure the financial community of the monetary stability of the US economy and will pull back the QE3 card for the near future.
S&P500 / Gold & silver prices – August update
The American stock markets suffered the most yesterday from the reaction to the US credit rating downgrade over the weekend: the S&P500 index fell by 6.66% yesterday, the Dow Jones index plummeted by 5.55%. The market also promptly reacted as gold price rose very sharply during most of August. The chart below shows the linear correlations of the daily percent changes of bullion prices (gold and silver) with S&P500 index during the past several months. The chart shows that the linear correlation of gold price with S&P500 index is currently negative and strong; the same was also true in July. Silver price, on the other hand, didn’t show much of a correlation to S&P500 in the past couple of months; this means that the drastic falls in the Stock markets are in line with the rises in gold price but not silver price. This finding should be taken with a grain of salt because there are very few samples points in August so that this finding isn’t significant.
US Dollar / Gold & silver prices – August update
The Euro to US dollar exchange rate declined on Monday by 0.73%; the US dollar appreciated against other currencies including the Australian dollar and Canadian dollar. If the US dollar will continue to appreciate during the day, this might continue to curb some of the rally of gold and silver prices. Currently it seems that silver price, more than gold price, is affected from the appreciations of the US dollar.
Current Gold and Silver prices
The precious metals prices are currently traded sharply changes in the US market:
The current gold price short term future (September 2011 delivery) is traded at $1,743.2 per t oz. a $30.0 or 1.75% increase as of 17:51*.
Current silver price, short term futures is at $37.940 per t oz – a $1.44 or 3.66% decline as of 17:52*.
The current ratio of gold to silver prices is at 45.94.
Gold and silver prices Outlook:
Gold price continues its rally in August mainly due to the back wind it enjoys from the sharp falls in the Stock markets; as long as the stock market will trade down, more traders will push their finds into gold. The news of the US downgrade will continue to push traders from stock market towards gold; the Federal Reserve meeting today might also affect the market depends on the decisions, if any, that will be made there. On the other hand, it seems that silver price isn’t rising as gold price is, because silver is less affected by the fall in the Stock markets and is more affected by the changes in the US dollar which is rising due to heavy trading. In any case, these sharp changes are likely to dissipate in the next few days and then gold and silver prices will stabilize and resume their slow upward trend.
Here is a reminder of the top events and reports that are planed for today and tomorrow (all times GMT):
OPEC monthly report
13:15 – Canadian Housing Starts
17:30 – Decision on Federal Reverse’s Interest Rate
Tentative –IEA monthly oil report
15:30 – EIA report about Crude oil inventories
2:30 – Australia rate of unemployment
For further reading:
Lior Cohen, M.A. commodities analyst and blogger at Trading NRG.