Weak dollar and geo-political tension send gold prices higher
Precious metals ended mixed today, Thursday, 27 December, 2007 after gold gained but silver slipped. The precious yellow metal once again gained after the dollar slipped against almost all its rival currencies and geo political tensions surfaced on the news of assassination of Benazir Bhutto, former Prime Minister of Pakistan. Crude oil price also rose substantially today.
Gold closed above the $830/ounce mark once again. Gold generally moves in the opposite direction of the U.S. currency. Gold, as a dollar-denominated commodity, suffers from dollar strength. US stocks also slumped after the news of tension in Pakistan.
Comex Gold for February delivery rose $3.4 (0.4%) to close at $832.9 an ounce on the New York Mercantile Exchange today. Prices touched $835/ounce during intra day trading. 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 fell 5.5 cents (0.4%) to $14.78 an ounce. Prices touched 26 year high on 7 November, after reaching $16.275. The metal has climbed 14.5% 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 fourth day, down 0.7% at 76.58.
In the energy market, oil prices ended substantially higher after Energy Department report showed that U.S. inventories fell more than expected. Crude oil for February delivery rose 65 cents (0.7%) to settle at $96.62 a barrel.
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. On the other hand strong dollar reduces the appeal of the metal as alternate source of investment.
Gold had climbed 30% 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.