Precious metals move up on inflation worries

Record crude price pushes gold and silver prices higher

After dropping earlier week, bullion metal prices closed higher today, Monday, 29 April, 2008 after energy prices rallied due to supply concerns. Last week, dollar rose strongly against its rivals thereby putting pressure on precious metal prices. Rising energy cost affects prices of bullion metals as a hedge against inflation. Silver prices also rose for the day.

Comex Gold for June delivery rose $5.8 (0.7%) to close at $895.5 ounce on the New York Mercantile Exchange. 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 7% for the till date against a 9% 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 rose 16.5 cents (1%) to $17.123 an ounce. Silver has gained 13.6% 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 soared to $119.93 a barrel, the highest ever, after BP shut a North Sea pipeline and a strike and rebel attacks in Nigeria disrupted production. Crude oil futures also stemmed from a strike called at a refinery in Scotland, forcing a key pipeline to be closed.

In the currency market today, the dollar fell slightly supporting gold's gains, as traders weighed the odds of the Federal Reserve further reducing benchmark U.S. interest rates. The dollar index, which tracks the value of the greenback against a basket of other currencies, fell 0.1% to 72.61.

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 on 30 April, 2008.

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 higher by Rs 64 (0.55%) at Rs 11,615 per 10 grams. Prices rose to a high of Rs 11,650 per 10 grams and fell to a low of Rs 11,551 per 10 grams during the day’s trading.

At the MCX, silver prices for May delivery closed Rs 184 (0.8%) higher at Rs 22,463/Kg. Prices opened at Rs 22,320/kg and rose to a high of Rs 22,623/Kg during the day’s trading.