Bullion gains after Fed cut

Price surge up as soon as Federal Reserve announces a 25 basis point cut in interest rate

Bullion metals finished higher today, Wednesday, 30 April, 2008 after Federal Reserve cut interest rates in US by another quarter percentage point bringing it down to 2%. This was the seventh rate cut by the Fed since last September, 2007. Silver prices also fell for the day. This rate cut weakened the dollar today against its rivals, mainly the euro. Gold prices rise with falling dollar as inflationary concerns boosts the metal's appeal as an inflation hedge.

Comex Gold for June delivery rose $14.9 (1.7%) to close at $880 ounce on the New York Mercantile Exchange. Earlier, the price closed lower by $11.6 at $865.1 just before the Fed announcement. 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 3.4% for the till date against a 9% 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 fell 5 cents (0.3%) to $16.59 an ounce. Silver has gained 10.5% 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.

In the currency market today, the dollar fell against major counterparts after the Fed decision. The dollar index, which tracks the performance of the greenback, dropped 0.5% to 72.54.

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.

The central bank lowered its benchmark interest rate 25 basis points to 2% today. The euro gained as much as 0.3 percent against the dollar after the cut, reversing earlier declines. Prioir to today, 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, and seven including today’s. The ECB has kept rates unchanged at 4% since June.

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 109 (0.9%) at Rs 11,370 per 10 grams. Prices rose to a high of Rs 11,486 per 10 grams and fell to a low of Rs 11,345 per 10 grams during the day’s trading.

At the MCX, silver prices for May delivery closed Rs 21 (0.09%) lower at Rs 21,945/Kg. Prices opened at Rs 22,050/kg and fell to a low of Rs 21,945/Kg during the day’s trading.