Bullion metals end sharply lower

Gold and silver prices drop sharply on concerns about a slowdown in US economy

Precious metal prices fell today, Tuesday, 4 March, 2008, a day after reaching all time record highs. Bullion metal prices fell sharply today on renewed concern that a slowing U.S. economy will curb demand for raw materials. Prices also fell as crude prices crawled back too reducing commodities’ appeal against a hedge against inflation. Traders also locked in gains after the metals’ surge in recent days. Silver prices also slipped substantially today.

Since the past few days, the bullion metal prices have been on a roll 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 to avoid the US economy in all ways from slipping into a recession. With this, the dollar had slumped sharply against its rival currencies.

Comex Gold for April delivery fell $17.9 (1.8%) to close at $966.3 an ounce on the New York Mercantile Exchange. Prices had touched a record $992/ounce during intra day trading yesterday. This year, gold prices have gained 16% till date. In January, prices gained 11%, the highest monthly gain since April 2006. For February, it gained 6%. Last week, gold gained $27 (2.8%).

Comex Silver futures for May delivery fell by 34 cents (1.7%) to $19.84 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%. In February, it gained another 15%.

The dollar has been dampened since last year, more since start of FY 2008 after interest rates were cut twice in January, 2008. Silver prices also gained substantially today, reaching the highest level in twenty eight years. 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.

The Fed has cut the federal funds rate to 3% this year from 5.25% in mid-September, 2007. January 2008 itself saw two rate cuts in a gap of ten days.

In the energy market today, crude-oil futures fell by more than $2 and closed a little above $100/barrel.

In the currency market today, the Canadian and Australian currencies both fell against the U.S. dollar after divergent policy moves by their respective central banks, though the greenback weakened against most other rivals. The dollar index, which tracks the performance of the greenback against a basket of six other major currencies, edged down 0.04% 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 lower by Rs 209 (1.6%) at Rs 12,437 per 10 grams. Prices rose to a high of Rs 12,705 per 10 grams and fell to a low of Rs 12,412 per 10 grams during the day’s trading.

At the MCX, silver prices for March delivery closed Rs 686 (2.7%) lower at Rs 24,889/Kg. Prices opened at Rs 26,271/kg and fell to a low of Rs 24,700/Kg during the day’s trading.