Gold & Silver – Daily Outlook August 8

Guest Commentary: Gold & Silver Daily Outlook 08.08.2011

The level of volatility in the financial markets is very high over 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 8 th :

Gold fell again on Friday by 0.43% and reached $1,651. Silver sharply declined by 3.09% to $38.21.

During August, gold price increased by 1.3% and silver fell by 4.7%.

The chart below shows the normalized gold and silver (July 12 th 2011=100). As seen below, gold and silver rose very rapidly during the first few days in August, but then they have changed direction and declined in the last couple of days.

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 it again within the next couple of years.

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.

USD/ Gold & Silver– August Update

The Euro/ USD exchange rate sharply inclined on Friday by 1.34%; the USD also depreciated against other currencies including the YEN. If the USD will continue to depreciate during the day, this might continue to affect the recent rally of gold and silver. During August there has been a strong correlation between bullion prices and Euro/ USD , 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).

Gold and Silver Outlook:

Gold and silver 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.

For further reading: Gold and silver prices outlook for August 2011

Lior Cohen , M.A. commodities analyst and blogger at Trading NRG.

By: Lior Cohen, Energy Analyst for Trading NRG