Bullion market rallies as weaker dollar makes precious metals attractive as inflationary hedge
Gold prices closed above the $900/ounce mark for the first time ever at Comex today, Monday, 15 January, 2008. Prices had crossed $900/ounce yesterday also but had ultimately closed lower for the day. Rally in gold continued to be spurred by dollar weakness and rising crude oil price. Silver prices too gained on Monday.
Gold generally moves in the opposite direction of the U.S. currency. Gold, as a dollar-denominated commodity, suffers from dollar strength.
Comex Gold for February delivery today rose $5.7 (0.6%) to close at $903.4 an ounce on the New York Mercantile Exchange. During intraday trading prices rose as high as $915.9/ounce. This year, prices have gained 7.6% till date.
Today’s closing price was the highest price after a record $873 that gold hit on 21 January, 1980.
Comex Silver futures for March delivery rose 5.5cents (0.3%) to $16.425 an ounce. This is an all time closing high for silver price. Silver has gained 9.7% in 2008. The metal had climbed 15.5% in FY 2007. The metal also has gained for seven straight years.
Gold witnessed the greatest annual gain in twenty eight years by gaining $200/ounce (31%) in FY 2007. In 2006, silver had jumped 46% while gold gained 23%.
Last week, Federal Reserve Chairman, Ben Bernanke said that U.S. central bank is struggling with a deteriorating economy brought on by a struggling housing market, high energy prices and a weaker stock market. To help situation from worsening further, he hinted that more interest rate cuts are on the way.
In the currency market today, the dollar index, which tracks the value of the greenback against a basket of other major currencies, fell to as low as 75.36, the weakest in six weeks.
In the energy market today crude oil rose $1.51 (1.6%) to close at $94.20 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 31% in FY 2007 as lower interest rates had sent the dollar tumbling, and crude-oil prices rose to a record.
The Fed reduced federal funds rate three times in FY 2007. The current interest rate stands at 4.5%. The Fed also lowered its discount rate twice, the interest it charges on direct loans it makes to banks, and currently it stands at 4.75%. With these interest rate cuts, dollar has been tumbling down.
At the MCX, gold prices for February delivery closed higher by Rs 96 (0.85%) at Rs 11,408 per 10 grams. Prices rose to a high of Rs 11,492 per 10 grams and fell to a low of Rs 11,282 per 10 grams during the day’s trading.
At the MCX, silver prices for March delivery closed Rs 111 (0.53%) higher at Rs 21,036/Kg. Prices opened at Rs 20,863/kg and rose to a high of Rs 21,360/Kg during the day’s trading.
Gold is expected to rally at all-time highs in the first quarter in FY 2008 as higher oil prices and a weaker dollar will continue to boost demand. Market expects another phase of interest rate cut in the end of the month. But gold is slated to average around $800/ounce in FY 2008 as against $696/ounce in FY 2007.