Gold backs off new highs

Gold touches a new high of $1034 during intra day trading

Precious metals created another new record on Monday, 17 March, 2008 after gold touched the $1034/ounce mark for the first ever time in history. Traders started selling off the precious metals to cover their losses in other market, mainly equity market. But at the end, gold pared most of its gains for the day and ended $3 higher. Silver prices fell substantially today.

Comex Gold for April delivery rose $3.1 (0.3%) to close at $1,002.6 ounce on the New York Mercantile Exchange, marking the first time the price has closed above $1,000. Earlier in the day, prices touched a high of $1033.8/ounce but then the metal gave up some of its gains later in the session. This year, gold prices have gained 19.5% till date. In January, prices gained 11%, the highest monthly gain since April 2006. For February, it gained 6%.

Stocks plunged worldwide yesterday after Bear Stearns accepted a buyout from JPMorgan Chase to avoid collapse. Last weekend, acting to prevent a run on major global financial firms, the Fed took the extraordinary steps of cutting the U.S. discount rate by a quarter of a point, to 3.25%, and offering to lend money to a longer list of firms than ever before. Gold reached the record in overnight trading after JPMorgan agreed to buy Bear Stearns for $2 a share, striking a deal backed by the Federal Reserve. Last week, gold prices gained $25.3 (2.6%).

Comex Silver futures for May delivery fell 35.5 cents (1.7%) to $20.30 an ounce. Silver has gained 32.5% 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%.

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.

In the energy market on Friday, crude oil fell by more than $4 today and closed a little above $105/barrel.

The dollar has been dampened since last year, more since start of FY 2008 after interest rates were cut twice in January, 2008. 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.

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 30 (0.2%) at Rs 13,065 per 10 grams. Prices rose to a high of Rs 13,397 per 10 grams and fell to a low of Rs 13,030 per 10 grams during the day’s trading.

At the MCX, silver prices for May delivery closed Rs 716 (2.7%) lower at Rs 26,032/Kg. Prices opened at Rs 26,800/kg and fell to a low of Rs 25,867/Kg during the day’s trading.