Bullion metals move higher for second straight day

Gold and silver prices rise as crude oil touches a new record high


Bullion metals rose for the second straight day today, Tuesday, 15 April, 2008 after energy cost rose to a new all time high. Rising energy cost affects prices of bullion metals as a hedge against inflation. Silver prices also rose for the day. Dollar on the other hand rose up marginally.

Generally, a stronger dollar pressures demand for dollar-denominated commodities, such as crude oil and gold, which become more expensive for holders of other currencies. On the other hand, a lower dollar pushes up precious metal prices as their demand lessens as it becomes cheaper for traders holding other currencies.

Comex Gold for June delivery today rose $3.3 (0.4%) to close at $932 ounce on the New York Mercantile Exchange. Prices reached a high of $939.8 during intra day trading today. Last week, gold prices gained 1.4% ($13.8) to end at $927. On 17 March, 2008 prices had skyrocketed to a high of $1,034/ounce.

This year, gold prices have gained 11.5% for the till date against a 8.2% drop for the dollar against the euro. For first quarter prices gained 10.7%. In January, prices gained 11%, the highest monthly gain since April 2006. For February, it gained 6%. But in March, prices succumbed and fell by 5.5%.

Comex Silver futures for May delivery rose 6 cents (0.3%) to $17.85 an ounce. Silver has gained 19.3% in 2008 till date. Silver gained 16% in Q1. In January this year itself, prices climbed 14%. In February, it gained another 15%. For March, it ended lower by 13%. The metal had climbed 16% in FY 2007. The metal also has gained for seven straight years.

In the currency market today, the dollar was off its lows from overnight thanks to bullish data, but still remained weak. The dollar index, which tracks the performance of the greenback against a basket of currencies, edged up 0.2% to 71.93.

In the energy market today, Crude oil and gasoline rose to records as investors purchased commodities because their returns have outpaced stocks, bonds and other financial instruments. Crude oil for May delivery rose $2.03 (1.8%) to settle at $113.79 a 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.

After weakening in the early part of the year, dollar tried to strengthen after Federal Reserve went through a slew of interest rate cuts. In the last of the series, Fed decided to cut overnight lending rate by 75 bps to 2.25% during third week of March, 2008. Since last September, Fed has axed interest rates six times. Hence, bullion metals along with other metals witnessed intense sell off together as traders parted away with commodities.

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.

At the MCX, gold prices for June delivery closed higher by Rs 29 (0.24%) at Rs 11,991 per 10 grams. Prices rose to a high of Rs 12,088 per 10 grams and fell to a low of Rs 11,975 per 10 grams during the day’s trading.

At the MCX, silver prices for May delivery closed Rs 43 (0.18%) higher at Rs 23,158/Kg. Prices opened at Rs 23,135/kg and rose to a high of Rs 23,440/Kg during the day’s trading.