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By Melissa Pistilli-Exclusive to Silver Investing News

On Monday, two of the financial markets biggest players opted out of the game. Lehman Brothers Holdings announced it was filing for Chapter 11 protection in the largest bankruptcy ever and Merrill Lynch & Co. sold itself over to Bank of America for US$50 billion.

There were also reports that another Wall Street heavy Insurance giant AIG was in need of US$15 billion in extra capital to prevent ratings downgrades.

Lehman’s failure rocked the financial community the hardest as the stability of the U.S. financial system has once again been called into question. The investment bank was forced to file once Barclays PLC and Bank of America back out of takeover talks.

The commodity sector took a hard hit from Lehman’s departure. “Lehman is an important counterparty in the commodity markets,” said Caylon metals strategist Robin Bhar. The majority of commodities on the London and New York exchanges fell causing as much as a 5 per cent drop in the GSCI Index of 24 commodities. The exceptions were gold and silver.

The two precious metals rose more than 2 per cent today as doubts in the strength of the U.S. financial sector prompted a run toward safer holdings. Silver futures for December reached US$11.10/oz by closing Monday.

Although the dollar dropped about 1 per cent against the euro, its largest one-day decline in six months, investors are moving back into gold and silver cautiously. Lehman’s news may have “shaken up financial market risk,” said Standard Bank metals analyst Manqoba Madninane, however “precious metals reacted with uncertainty.”

The dollar was due for a correction, added Madninane, and “supported precious metals, albeit with some investors choosing to err on the side of caution.” He believes the dollar’s drop “may have been overdone” and “should keep precious metal investment sentiment cautious … as investors search for more dollar clues.”

Silver and gold price gains were most likely held back by further slides in the price of crude oil. Lehman, along with other large institutional investors, was a major player in this past year’s commodities boom that helped move not only precious metals to new heights, but crude prices as well. Now, as institutions like Lehman and Merrill fall prey to a crumbling equities market on top of quashed supply concerns in the Gulf, oil prices have given up this year’s gains to close below US$95 a barrel for the first time in 6 months on Monday.

Although Hurricane Ike annihilated 10 oil and gas platforms and damaged pipelines in the Gulf of Mexico, that destruction is only a small part of the 3,800 production platforms in the Gulf. “Fears of widespread refinery damage have been allayed considerably and a number of facilities are coming back up in a timely fashion,” said Jim Ritterbusch, President of energy consultancy Ritterbusch and Associates in Galena, Ill.

Tuesday morning, silver along with gold took a dive once again as crude oil prices continued on a downward spiral. Oil dropped below US$91 a barrel on concerns that the nightmare on Wall Street will further cripple an already weakened global economy subsequently reducing demand. “The fear is that the sharp deterioration of the banking crisis in the U.S. will spread to the real economy and demand for oil,” said Commerzbank AG analyst Carsten Fritsch. “There is a good possibility prices will fall further before they stabilize.”

The precious metals are still closely linked with crude and whatever gains silver made yesterday were quickly lost as silver fell back down to US$10.51/oz as of 10:00 EST.

Questions about this article? Leave a comment below or contact our editorial team at editor@resourceinvestingnews.com.