Gold benefits stock market falls – Daily Outlook August 19

Gold rose again yesterday and thus has completed four consecutive days of gains.

The sharp falls in the stock market around the world mainly in the US provided the back wind for the ongoing rally of gold and silver this week. The US existing home sales report about July showed a further drop in sales compared with June’s sales rate. This news might have triggered the sharp falls in the stock market as the markets continue to present concerns over a double dip recession in the US. 

Gold and silver continue to break new highs: Gold rose on Thursday by 1.57% to $1,822; silver also inclined by 0.84% to $40.72. During August, gold increased by 11.7%, and silver slightly inclined by 1.5%.

S&P500 / Gold & silver– August update

The S&P500 index sharply fell yesterday by 4.46% – the last time there was such a sharp decline was back in August 10th. During August the linear correlation of gold and silver with S&P500 (daily per cent changes) was -0.516 (for gold) and -0.301 (for silver). This means, as the S&P500 decreases, gold and silver inclines. If the S&P500 will continue to fall, it may further push gold and silver up. Notice in the chart below the sharp shifts in the relation between S&P500 and gold price in the past months. This indicates the relation between these indexes is more complicated than just a linear one.

U.S. existing home sales

Following the decline in US housing starts and building permits during July 2011, the U.S. existing home sales also showed a slow down. In the recent report, the seasonally adjusted annual rate fell by 3.5% to 4.67 million home sales. This news presents a further slowdown in economic activity in particular in the housing market. This news might have also rekindled the falls in the stock markets over concerns of a double dip recession. 

U.S. unemployment claims

For the week ending on August 6th, the number of insured unemployment fell by 4,500 to 3.716 million (4-week moving average). This decrease may indicate more people found jobs or gave up looking, but in any case might serve to decrease the August unemployment rate (see here my recent review on the US labour market).

 Gold and silver Outlook:

Gold and silver continue their ascend at a higher pace than in the past couple of days as the stock markets indexes fell very sharply and traders pull their funds towards gold, silver and US treasury bonds. The US existing home sales might have stimulated the markets to react so sudden and trade down. Usually, a day of sharp falls is followed by a sharp correction; if this will be the case in the stock markets it might curb the rises in gold and silver, but less likely to shift their direction to falls.  Therefore, I still think that gold and silver will continue their rally, but with much less volatility than in the beginning of August.


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