A bright day for precious metals

Precious metals rise as crude hits new high and dollar slumps

Precious metals registered good increase today, Tuesday, 20 May, 2008 after crude oil prices rallied and dollar slipped against its rivals. The dual effect helped restore some glitter back on the precious metals. Yesterday, gold marked its first closing above $900 level in almost a week. Crude oil's rally to a fresh record high above $129 a barrel boosted the precious 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. 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 rose $14.4 (1.6%) to close at $920.2 ounce on the New York Mercantile Exchange. During intra day trading, prices touched a high of $923.8/ounce. Last week, gold prices ended higher by $14 (1.6%). On 17 March, 2008 prices had skyrocketed to a high of $1,034/ounce. Prices have dropped by 11% since then.

This year, gold prices have gained 9.8% for the till date against a 8.6% drop for the dollar against the euro. For April, prices closed lower by 6.3%. 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 69.7 cents (4.1%) to $17.725 an ounce. Silver has gained 19% in 2008 till date. For April, it closed lower by 5.5%. 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.

At the currency markets on Tuesday, the U.S. dollar fell against its major rivals on higher inflation in Germany and tamer U.S. inflation. The dollar declined as much as 1.1% against the euro on speculation the European Central Bank will keep interest rates high. The dollar index, which tracks the performance of the greenback against other currencies, fell to 72.43 from 73.059 in late North American trading on Monday.

Since last September, Fed has axed interest rates seven times and brought it down to 2%. The ECB has kept rates unchanged at 4% since June, 2007.

Dollar weakness typically benefits dollar-denominated commodities, such as gold and crude oil, because it makes them cheaper for holders of other currencies. On the other hand strong dollar reduces the appeal of the metal as alternate source of investment.

Among major economic news of the day, a government report today showed U.S. producer prices, excluding food and fuel, rose more than forecast in April. Food costs last month surged the most in 18 years.

In the crude market, crude-oil futures marked their first close above $128 a barrel on Tuesday. Crude-oil futures rallied touching a high of $129.45 a barrel in New York, as weakness in the U.S. dollar underpinned oil prices and concerns about global supply and demand continued. Crude oil rose for a third straight session after billionaire hedge-fund manager Boone Pickens said prices will reach $150 a barrel this year as demand outpaces supply. Last week, crude-oil futures rallied to a fresh record high near $128 a barrel as Goldman Sachs raised its second-half-of-the-year forecast for oil prices by 32% to $141.

At the MCX, gold prices for June delivery closed higher by Rs 250 (2.1%) at Rs 12,606 per 10 grams. Prices rose to a high of Rs 12,645 per 10 grams and fell to a low of Rs 12,353 per 10 grams during the day’s trading.

At the MCX, silver prices for July delivery closed Rs 857 (3.6%) higher at Rs 24,331/Kg. Prices opened at Rs 23,500/kg and went to a high of Rs 24,400/Kg during the day’s trading.