Record close for bullions

Gold and silver prices take a leap on interest rate outlook


Bullion metal prices rose sharply higher for the third straight day today, 28 February, 2008 after the dollar slumped sharply against its rival currencies, mainly the euro. The dollar have been dampened mainly since yesterday after the Federal Reserve Chairman, Ben Bernanke hinted that Fed in all possibility will go for another soft landing in its next meeting thereby reducing interest rates by another 50 bps.

This has been weakening dollar further. Gold, as a dollar-denominated commodity, suffers from dollar strength. On the contrary, gold prices rise with falling dollar as inflationary concerns boosts the metal's appeal as an inflation hedge. Silver prices also gained substantially today, reaching the highest level in twenty eight years.

Comex Gold for April delivery rose $6.5 (0.7%) to close at $967.5 an ounce on the New York Mercantile Exchange. Prices touched a record $975/ounce during after hours trading. This year, gold prices have gained 15.7% till date. In January, prices gained 11%, the highest monthly gain since April 2006.

Last week, gold gained $41.5 (4.6%). Prices increased due to the slumping dollar and supply issues at South Africa.

Comex Silver futures for May delivery rose by 43.2 cents (2.2%) to $19.756 an ounce. Silver has gained 28% 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%.

The Fed has cut the federal funds rate to 3% from 5.25% in mid-September. January 2008 itself saw two rate cuts in a gap of ten days.

In the energy market today, crude-oil futures rose substantially and closed at more than $102/barrel on reports of production disruptions in Nigeria and record low dollar against the euro.

In the currency market today, the U.S. dollar tumbled to record lows against the euro after lackluster economic data and Federal Reserve Chairman Ben Bernanke's comments raised fears about the U.S. economy. The trade-weighted dollar index, which measures the greenback against a basket of six major currencies, fell 1.2% to 73.68.

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. On the other hand strong dollar reduces the appeal of the metal as alternate source of investment.

Gold witnessed the greatest annual gain in twenty eight years by gaining $200/ounce (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. In 2006, silver had jumped 46% while gold gained 23%.

At the MCX, gold prices for April delivery closed higher by Rs 59 (0.5%) at Rs 12,293 per 10 grams. Prices rose to a high of Rs 12,330 per 10 grams and fell to a low of Rs 12,175 per 10 grams during the day’s trading.

At the MCX, silver prices for March delivery closed Rs 326 (1.3%) higher at Rs 24,683/Kg. Prices opened at Rs 24,255/kg and went to a high of Rs 24,840/Kg during the day’s trading.