A dull day for precious metals

Slipping crude price and strength in dollar dampen appetite for commodities

Bullion metals registered sharp drop today, Tuesday, 29 April, 2008 after crude oil prices eased by more than $3/barrel and after the dollar rallied against its rivals. Last week, dollar rose strongly against its rivals thereby putting pressure on precious metal prices. On the other hand, rising energy cost affects prices of bullion metals as a hedge against inflation. Silver prices also fell for the day.

Comex Gold for June delivery fell $18.7 (2.1%) to close at $876.8 ounce on the New York Mercantile Exchange. The price earlier touched $873.60, the lowest for a most-active contract in almost last three months. Last week, gold prices lost $20(2.8%) against previous week’s close. On 17 March, 2008 prices had skyrocketed to a high of $1,034/ounce.

This year, gold prices have gained 5% for the till date against a 8.5% 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 July delivery fell 48.3 cents (2.8%) to $16.64 an ounce. Silver has gained 10.8% 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 energy market today, crude oil fell more than $3 a barrel, the biggest decline in four weeks, after BP restarted a North Sea oil pipeline and the dollar strengthened, reducing the appeal of commodities to investors.

In the currency market today, the U.S. currency headed for its first monthly advance this year against the euro as traders increased bets the Fed will stop lowering bank-borrowing costs after cutting the benchmark federal funds rate by 25 basis points tomorrow. The Federal Reserve's interest-rate meeting begins Tuesday afternoon. The statement will be released on Wednesday at 2:15 p.m. E.T. The dollar index, which tracks the performance of the greenback against a basket of other major currencies, gained 0.3% to 72.83.

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.

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.

The Fed has reduced its benchmark interest rate by 3 percentage points to 2.25 percent since last September as a housing slump and credit squeeze threatened to push the economy into a recession. Since last September, Fed has axed interest rates six times. The ECB has kept rates unchanged at 4% since June. Traders are looking forward to Fed’s decision on interest rates in its next forthcoming meeting tomorrow.

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 June delivery closed lower by Rs 136 (1.2%) at Rs 11,479 per 10 grams. Prices rose to a high of Rs 11,612 per 10 grams and fell to a low of Rs 11,465 per 10 grams during the day’s trading.

At the MCX, silver prices for May delivery closed Rs 321 (1.4%) lower at Rs 22,142/Kg. Prices opened at Rs 22,385/kg and fell to a low of Rs 22,051/Kg during the day’s trading.