Gold, silver fall

Gold and silver prices once again end substantially down as dollar rallies

Precious metals closed considerably down once again on Thursday, 20 March, 2008. Prices fell after dollar continued to rally after Federal Reserve decided to cut overnight lending rate by 75 bps to 2.25% earlier this week. A stronger dollar pressures demand for dollar-denominated commodities, such as crude oil and gold, which become more expensive for holders of other currencies. Silver prices fell substantially on that day.

After dropping almost $60 on Wednesday, Comex Gold for April delivery fell $25.3 (2.7%) to close at $920 ounce on the New York Mercantile Exchange. Earlier in the week on Monday, 17 March, prices skyrocketed to a high of $1,034/ounce. But since Wednesday, after Fed’s interest rate cut decision was out, prices started tumbling.

This year, gold prices have gained 9.3% till date. In January, prices gained 11%, the highest monthly gain since April 2006. For February, it gained 6%. But ion March, prices have succumbed. For the week, gold prices dropped by more than 8%.

Comex Silver futures for May delivery fell $1.59 (8.6%) to $16.85 an ounce. Silver has gained 25% 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.

The Fed action took the federal funds rate target down to 2.25%, the lowest since December 2004. Since last September, Fed has axed interest rates six times.

In the currency market, the dollar continued to rally, with the dollar index, which measures the U.S. unit against a basket of major currencies, up 1%.

At the MCX, gold prices for April delivery closed lower by Rs 323 (2.6%) at Rs 12,048 per 10 grams. Prices rose to a high of Rs 12,357 per 10 grams and fell to a low of Rs 11,858 per 10 grams during the day’s trading.

At the MCX, silver prices for May delivery closed Rs 1,745 (7.2%) lower at Rs 22,276/Kg. Prices opened at Rs 23,901/kg and fell to a low of Rs 22,110/Kg during the day’s trading.