Gold ends year 31% higher

Gold drops for first time in six sessions as dollar strengthens

Precious metals ended mixed on Monday, 31 December, 2007 as gold slipped but silver gained. The precious yellow metal dropped for the first time in six sessions as dollar strengthened against its rival currencies. Nevertheless, gold witnessed the greatest annual gain in twenty eight years by gaining $200/ounce (31%) in FY 2007.

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 slipped $4.7 (0.6%) to close at $838 an ounce on the New York Mercantile Exchange on Monday, 31 December. Last week, gold prices gained 3.3% ($27.3/ounce). 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 2.5 cents (0.2%) to $14.92 an ounce. Prices touched 26 year high on 7 November, after reaching $16.275. The metal has climbed 15.5% this year. The metal also has gained for seven straight years.

In 2006, silver had jumped 46% while gold gained 23%.

In the currency market today, the dollar index, which tracks the value of the greenback against a basket of other major currencies, rose for the first time in six days, up 0.5% to 76.695. The dollar strengthened against the euro today after an industry report showed sales of previously owned homes unexpectedly increased last month.

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 57% 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 31% this year as lower interest rates had sent the dollar tumbling, and crude-oil prices rose to a record. Dollar is 8.7% 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.

At the MCX, gold prices for February delivery closed lower by Rs 46 (0.4%) at Rs 10,598 per 10 grams. Prices rose to a high of Rs 10,720 per 10 grams and fell to a low of Rs 10,566 per 10 grams during the day’s trading.

At the MCX, silver prices for March delivery closed Rs 10 (0.05%) higher at Rs 19,463/Kg. Prices opened at Rs 19,498/kg and went to a high of Rs 19,633/Kg during the day’s trading.

Gold might rally to all-time highs in the first quarter in FY 2008 as higher oil prices and a weaker dollar will continue to boost demand.