Precious metals glittering all along

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


Bullion metals rose for the third straight day today, Wednesday, 16 April, 2008 after energy cost rose to a new all time high and dollar fell to extreme lows against the counterparts. Rising energy cost affects prices of bullion metals as a hedge against inflation. Silver prices also rose for the day.

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 $16.3 (1.7%) to close at $948.3 ounce on the New York Mercantile Exchange. Prices reached a high of $952.7 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. Prices are 8.3% lower since that high.

This year, gold prices have gained 13.2% 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 May delivery rose 47.5 cents (2.7%) to $18.325 an ounce. Silver has gained 22% 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 remained under pressure against most major counterparts, notching a fresh low against the euro after mixed U.S. economic data. The dollar index, which tracks the performance of the greenback against a basket of other major currencies, fell 1% to 71.30.

Among major economic news, the Commerce Department reported that U.S. home builders started the fewest homes in 17 years, as housing starts plunged 11.9% to a seasonally adjusted annual rate of 947,000 in March. March's rate was the lowest for housing starts since March 1991. Starts were down 36.5% compared with March 2007.

In the energy market today, crude-oil futures rose more than $1 to surpass $115 a barrel after weekly inventory data showed a surprising drop in U.S. crude inventories and as the dollar dipped anew, raising oil's attraction as an investment alternative. Crude oil closed at $114.93 today, a new all time high.

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.

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.

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 184 (1.5%) at Rs 12,175 per 10 grams. Prices rose to a high of Rs 12,247 per 10 grams and fell to a low of Rs 11,940 per 10 grams during the day’s trading.

At the MCX, silver prices for May delivery closed Rs 578 (2.5%) higher at Rs 23,736/Kg. Prices opened at Rs 23,120/kg and rose to a high of Rs 23,995/Kg during the day’s trading.