Gold loses strength

Gold closes higher but drops substantially in after hours trading

Precious metals closed marginally higher today, Tuesday, 18 March, 2008 but prices fell in the after hours trading in response to Federal Reserve’s 75 bps interest rate cut bring the rate down to 2.25%. Federal Reserve lowered U.S. interest rates less than some investors anticipated, bolstering the dollar and reducing the appeal of the precious metal. Silver prices fell substantially today.

Comex Gold for April delivery rose $1.7 (1.7%) to close at $1,004.3 ounce on the New York Mercantile Exchange, marking the second time the price has closed above $1,000. This year, gold prices have gained 18% till date. But in the after hours trading, gold futures for April delivery fell by more than $25 to $979 an ounce at electronic trading on the Comex division of the New York Mercantile Exchange. In January, prices gained 11%, the highest monthly gain since April 2006. For February, it gained 6%.

Comex Silver futures for May delivery fell 7 cents (0.3%) to $19.96 an ounce. Silver has gained 32% 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 rose by more than $4 today and closed a little above $108/barrel.

The Fed action takes the federal funds rate target down to 2.25%, the lowest since December 2004. The Fed said the size of the rate cut was enough to promote growth. The Fed's move sent the dollar up the most in almost four years against the yen, and the euro dropped. The dollar index, which measures the U.S. unit against a basket of major currencies, rebounded after the Fed announcement to gain 0.1% to 71.58.

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.

Prior to today, the Fed had 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%. Gold has tripled in five years as investment demand has soared and mine supplies have remained low.

At the MCX, gold prices for April delivery closed higher by Rs 25 (0.2%) at Rs 13,090 per 10 grams. Prices rose to a high of Rs 13,179 per 10 grams and fell to a low of Rs 13,034 per 10 grams during the day’s trading.

At the MCX, silver prices for May delivery closed Rs 64 (0.24%) lower at Rs 25,968/Kg. Prices opened at Rs 26,088/kg and fell to a low of Rs 25,815/Kg during the day’s trading.