Gold headed for largest annual gain in twenty-eight years
Precious metals ended higher on Friday, 28 December, 2007. The precious yellow metal once again gained after the dollar slipped against almost all its rival currencies. This was gold’s fifth straight daily gain. The assassination of Benazir Bhutto, former Prime Minister of Pakistan on Thursday, 27 December also contributed in gold prices gaining.
Gold generally moves in the opposite direction of the U.S. currency. Gold, as a dollar-denominated commodity, suffers from dollar strength. With Friday’s gain, gold is headed for greatest annual gain in twenty eight years.
Comex Gold for February delivery rose $10.9 (1.3%) to close at $842.7 an ounce on the New York Mercantile Exchange on Friday, 28 December. For the week, gold prices gained 3.3% ($27.3/ounce). Last week, the yellow metal gained $17.4/ounce (2.2%). On, 7 November, prices had touched $848/ounce. It was the highest price after a record $873 on 21 January, 1980.
Comex Silver futures for March delivery rose 7.7 cents (0.5%) to $14.895 an ounce. Prices touched 26 year high on 7 November, after reaching $16.275. The metal has climbed 15% this year.
Gold is headed for a seventh straight annual gain. In 2006, silver had jumped 46% while gold gained 23%.
In the currency market today, the dollar index, which tracks the value of the U.S. currency against a basket of other major currencies, fell for a fifth day, down 0.5% at 76.205. A weaker greenback makes dollar-denominated gold more attractive as an investment alternative.
Gold has traditionally been used as a safe-haven asset against rising inflation. Investor sentiments are boosted by the fact that gold and silver are alternate sources of good investment in the face of declining dollar and rising energy prices. Rising crude increases inflationary pressures and vice versa. Crude is almost 60% higher on a yearly basis. On the other hand strong dollar reduces the appeal of the metal as alternate source of investment.
Gold had climbed 32% this year till date as lower interest rates had sent the dollar tumbling, and crude-oil prices rose to a record. Dollar is still 9% down against the euro this year.
The Fed has reduced overnight lending rates by 1% in FY 2007. On 11 December, Federal Reserve lowered the federal funds rate by a quarter-point to 4.25%. The Fed also lowered its discount rate, the interest it charges on direct loans it makes to banks, by a quarter-point to 4.75%.
Before 11 December, Federal Reserve had cut the fed funds rate by a quarter-point to 4.50% on 31 October, 2007. Prior to that, Federal Reserve had cut interest rates by half percentage point on 19 September, 2007. With these interest rate cuts, dollar has been tumbling down. Market anticipates that there will be more rate cut in the coming year.