Deep fall for precious metals

Gold and silver prices witness sharp fall as the dollar strengthens and crude retreats from highs

After rising more than 3% last week, precious metals ended lower on Tuesday, 27 May, 2008 after crude prices fell below the $130 level and the dollar strengthened against its rivals. Gold prices dropped more than $18 today. Last week, crude oil's rally to a fresh record high above $133 a barrel boosted the precious metal's appeal as an inflation hedge. Oil has doubled in the past year, fueling concern inflation will accelerate.

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 fell $17.9 (1.9%) to close at $907.9 ounce on the New York Mercantile Exchange. Early profit-taking was subsequently exacerbated by the sell-off in oil and another tentative dollar rally. Last week, gold prices ended higher by $25 (3%). On 17 March, 2008 prices had skyrocketed to a high of $1,034/ounce.

This year, gold prices have gained 8.5% for the till date against a 7.5% 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 82.5 cents (4.5%) to $17.465 an ounce. Silver has gained 16.2% 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 dollar extended gains against major rivals building on gains from weak German consumer confidence data earlier. The dollar index, which tracks the greenback against a basket of six major currencies, was up 0.3% to 72.213.

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, the Conference Board reported that U.S. consumer confidence extended its tumble in May to reach a 16-year-low, as inflation expectations reached a record on rising gas prices.

In the crude market on Tuesday, crude-oil futures fell below $130 a barrel to close at their lowest level in a week, with the market ignoring fresh threats to oil supply as traders took in profits from an almost 5% rise in oil prices last week. Crude oil for July delivery closed at $128.85 a barrel on the New York Mercantile Exchange, down $3.34, or 2.5% for the session.

Last week, crude oil rose till $135 after billionaire hedge-fund manager Boone Pickens said prices will reach $150 a barrel this year as demand outpaces supply.

At the MCX, gold prices for June delivery closed lower by Rs 245 (1.9%) at Rs 12,543 per 10 grams. Prices rose to a high of Rs 12,852 per 10 grams and fell to a low of Rs 12,516 per 10 grams during the day’s trading.

At the MCX, silver prices for July delivery closed Rs 1106 (4.4%) lower at Rs 24,255/Kg. Prices opened at Rs 25,370/kg and fell to a low of Rs 24,204/Kg during the day’s trading.