A new day for bullion metals

Gold and silver prices rise sharply as crude prices soar by more than $5

Precious metal prices rose to all time highs, Wednesday, 5 March, 2008, after dollar fell to an all time low against the euro and crude prices surpassed $104/barrel. Prices rose as crude prices rallied increasing the commodities’ appeal against a hedge against inflation. Silver prices also gained substantially today.

Comex Gold for April delivery rose $22.2 (2.3%) to close at $988.5 an ounce on the New York Mercantile Exchange. Prices had touched a record $995.2/ounce during intra day trading today. This year, gold prices have gained 19% 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 rose by 94.5 cents (4.8%) to $20.785 an ounce. Silver has gained 33% 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. 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.

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.

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 rose by almost $5 and closed above $104/barrel after OPEC members decided to keep production unchanged at its meeting at Vienna today. Prices also rose after Energy Department reported a drop in crude inventories for last week.

In the currency market today, the dollar tumbled to a new record low against the euro as surging oil prices gave the European unit a lift. But the dollar held the line on maintaining most of its earlier gains against Japan's yen, which it marked after a gauge of U.S. non-manufacturing activity came in not as bad as expected. The dollar index, which tracks the performance of the greenback against other major currencies, dropped 0.3% to 73.49.

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 331 (2.7%) at Rs 12,768 per 10 grams. Prices rose to a high of Rs 12,871 per 10 grams and fell to a low of Rs 12,383 per 10 grams during the day’s trading.

At the MCX, silver prices for March delivery closed Rs 775 (3.1%) lower at Rs 24,114/Kg. Prices opened at Rs 24,650/kg and went to a high of Rs 26,382/Kg during the day’s trading.