The first week of August, 2011 saw the world financial markets tumbling like a house of cards, the trigger being the US debt downgrade by credit ratings agency Standard & Poor's. Financial markets continued to demonstrate large volatility last week with equities, risky assets and commodities tumbling and bonds ralling. Gold was the winner of recent market volatility as investor’s flea to the perceived safety of this precious metal. In contrast, Crude and copper, which are the commodities that are most dependent on economic growth, are the losers of the last few weeks due to fear of a recession.
The US downgrade was only a starting point. Now there maybe another developed economy that faces similar fears. This time it is France's turn to panic. The country's debt has increased to a whopping 82% of its Gross Domestic Product. As per rating guidelines, this is way too high for the 'safe 'AAA' rating. At the same time, the country's economic growth has slowed down to a snail's pace. As a result, there were fresh fears that the Big 3 rating agencies may downgrade French debt.
On Tuesday, the Fed took the unprecedented step of promising it would keep interest rates near zero for a set period of time- at least until 2013 - and said it was exploring other options to support a flagging recovery. This boosted Gold to trade above $1800 and Crude Oil to trade low of $76. On Thursday, CME increased margin of COMEX Gold by 22%, after Gold tumbled from record high of $1817 to $1732 in single day. Even Crude Oil saw huge swings in prices, it fell 9% from $83 to $76 and then with equity indices and trading in oversold zone, it recovered 13% from lows to trade above $85.
After daily moves from $60 to $80, a day in which gold moves "ONLY" $20 will be a pleasant relief. So much depends however on what happens next in the bizarro-land of the equity markets so for now we wait and see like the rest of the investing/trading world what the computer algorithms will do next. All depends on just how hungry the bulls are to move back into the market. Initial downside support comes in just below $1720 and then down near $1700. That is followed by more formidable chart support near and just below $1,680.
Volatility is likely to remain high across the markets as there remains a massive amount of uncertainty as seen by yesterday's focus on France and some of its banks. This evokes memories of the banking and credit crises of 2008 so we would expect the markets to remain on tenterhooks. As such, although we may see some powerful rallies we feel it is too early to get too comfortable with these as there may well be further and deeper pull backs in the days and weeks ahead.
Courtesy: Edelweiss Comtrade Limited Research
