Precious metals rally

Gold and silver prices rally as economic reports from US disappoint while eurozone confidence zooms

Precious metals rose for the second consecutive day, Wednesday, 26 March, 2008 as dollar continued to weaken as poor economic news continued to pour in. A lower dollar pushes up precious metal prices as their demand lessens as it becomes cheaper for traders holding other currencies. Silver prices also rose for the day. Last week, gold and silver prices had dropped by 8% and 18% respectively.

After dropping more than 8% last week, Comex Gold for April delivery rose $14.2 (1.5%) to close at $949.2 ounce on the New York Mercantile Exchange. Earlier last week on Monday, 17 March, prices skyrocketed to a high of $1,034/ounce. But since last Wednesday, 19 March, after Fed’s interest rate cut decision was out, prices started tumbling.

This year, gold prices have gained 12.5% till date. In January, prices gained 11%, the highest monthly gain since April 2006. For February, it gained 6%. But in March, prices have succumbed. Last week, gold prices shed 8.3%.

Comex Silver futures for May delivery rose 58.3 cents (3.3%) to $18.383 an ounce. Silver has gained 34% 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%.

Barring these two days, gold and silver prices had dropped in the three days prior to that. Prices were pressured as dollar strengthened. Dollar continued to rally after Federal Reserve decided to cut overnight lending rate by 75 bps to 2.25% earlier last 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. Hence, bullion metals along with other metals witnessed intense sell off together as traders parted away with commodities.

In the currency market today, the dollar index, which tracks the value of the greenback against a basket of major currencies, fell 0.5% to 71.726. The dollar came under renewed pressure, especially against the euro, after reports showing resilient business sentiment in the euro zone's two biggest economies. Reports showed German business confidence increased in March.

On the other hand, in the US, new home sales fell to a 13 year low in February and also there was a 1.7% drop in durable good order in USA for February.

In the energy market today, crude oil rose by more than 4% due to the inventory report by the Energy Department and the weaker dollar. Crude oil for May delivery rose $4.6 (4.6%) to settle at $105.9 a barrel.

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.

Prior to this latest cut, 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 215 (1.8%) at Rs 12,335 per 10 grams. Prices rose to a high of Rs 12,357 per 10 grams and fell to a low of Rs 12,131 per 10 grams during the day’s trading.

At the MCX, silver prices for May delivery closed Rs 793 (3.4%) higher at Rs 23,825/Kg. Prices opened at Rs 23,088/kg and rose to a high of Rs 23,938/Kg during the day’s trading.