Precious metals register significant drop

Gold and silver prices close lower as the dollar climbs up

Precious metals ended significantly lower on Tuesday, 13 May, 2008. Dollar strengthening up against its rivals was the main reason behind this.

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. 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.

Comex Gold for June delivery fell $15.3 (1.7%) to close at $869.6 ounce on the New York Mercantile Exchange. Last week, gold prices ended higher by $3.2 ($27.8). On 17 March, 2008 prices had skyrocketed to a high of $1,034/ounce.

This year, gold prices have gained 4.3% for the till date against a 8% 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 40 cents (2%) to $16.83 an ounce. Silver has gained 12.8% 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.

On the currency markets on Tuesday, the U.S. dollar climbed against other major currencies after the Commerce Department reported better-than-expected April retail sales. The euro extended losses against the dollar and traded at $1.5482, down from late Monday.

Commerce Department reported today that U.S. retail sales fell for the third time in the past five months in April, led by a big decline in auto sale, but were slightly stronger than the 0.3% drop expected.

In the crude market, crude futures closed higher as issues over Iranian oil production, uncertainty ahead of weekly data on U.S. inventories and a rally in heating oil prices combined to briefly lift oil to uncharted territory near $127 a barrel.

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.

At the MCX, gold prices for June delivery closed lower by Rs 133 (1.1%) at Rs 11,828 per 10 grams. Prices rose to a high of Rs 11,951 per 10 grams and fell to a low of Rs 11,731 per 10 grams during the day’s trading.

At the MCX, silver prices for July delivery closed Rs 419 (1.8%) lower at Rs 23,048/Kg. Prices opened at Rs 23,420/kg and fell to a low of Rs 22,750/Kg during the day’s trading.