Higher energy price pushes bullion prices higher

Gold and silver prices rise for the fourth consecutive day

Bullion metals rose for the fourth consecutive day today, Monday, 11 February, 2008. Prices rose as crude oil rallied boosting the appeal of the precious metal as a hedge against inflation. Also, news of potential supply shortages in South Africa continued to hit the market. Silver prices also ended considerably higher for the day.

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 April delivery rose $4.4 (0.5%) to close at $926.7 an ounce on the New York Mercantile Exchange. On 30 January, 2008 prices had hit a high of $941 in the after hours trading. This year, prices have gained 11.3% till date. In January, prices gained 11%, the highest monthly gain since April 2006. Last week, gold prices closed higher by $8.8 (0.96%) against previous close of $913.5.

Comex Silver futures for March today rose by 36 cents (2.1%) to $17.47 an ounce. Silver has gained 16.1% in 2008. The metal had climbed 16% in FY 2007. The metal also has gained for seven straight years. In January this year itself, prices climbed 14%.

As per reports, severe power shortages in South Africa, the world's second-largest gold producer continued to post serious threats to mine production.

But gold's gains were limited today after the Group of Seven officials meeting in Tokyo said they supported the International Monetary Fund's effort sell its gold reserves in order to invest in higher-yielding assets.

In the energy market today, crude oil rose to a one-month high after Valero Energy shut its Delaware refinery because of a storm-related power failure yesterday and cold weather moved across the northern U.S. Crude prices rose $1.82 (2%) to settle at $93.59 a barrel. Last Friday, crude prices surged more than 4% as OPEC minister hinted at a production cut to restore back crude prices at higher level.

In the currency markets today, the dollar traded mainly lower against most major counterparts, slipping against the euro. The dollar index, which tracks the performance of the greenback against a basket of other major currencies, edged down 0.1% to 76.560.

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.

On 31 January, 2008, the Federal Reserve lowered interest rates 0.5% point to 3% today. This was on top of the 75 bps rate cut to 3.5% that Fed did earlier this year. The interest rate cuts are to avoid the US economy from plunging into recession.

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%.

Gold had climbed 31% ($200/ounce) 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.

At the MCX, gold prices for April delivery closed higher by Rs 38 (0.3%) at Rs 11,765 per 10 grams. Prices rose to a high of Rs 11,809 per 10 grams and fell to a low of Rs 11,690 per 10 grams during the day’s trading.

At the MCX, silver prices for March delivery closed Rs 333 (1.5%) higher at Rs 22,232/Kg. Prices opened at Rs 21,905/kg and rose to a high of Rs 22,358/Kg during the day’s trading.