Precious metals slip for second straight day

Gold and silver prices register modest fall as the dollar strengthens

After rising more than 3% last week, precious metals ended lower for the second consecutive day on Wednesday, 28 May, 2008 after the dollar strengthened against its rivals. Prices of precious metals fell despite crude prices rising. 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 $7.8 (0.9%) to close at $900.5 ounce on the New York Mercantile Exchange. Much of the trading volume has moved to the August contract. August gold finished the day at $905 an ounce, down $7.80. Yesterday, prices had dropped more than $18. 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 7.6% 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 5 cents (0.3%) to $17.415 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 Wednesday, the dollar firmed up after a report showing orders for durable goods fell a milder-than-expected 0.5% in April. The dollar index, which tracks the greenback against a basket of major currencies, was at 72.535, up from 72.389.

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. In 2006, silver had jumped 46% while gold gained 23%.

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.

In the crude market on Wednesday, crude oil rose more than $2 a barrel after Morgan Stanley said that Brent oil from the North Sea could easily' reach $150 a barrel. Crude oil for July delivery rose $2.18 (1.7%) to settle at $131.03 a barrel. 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 99 (0.8%) at Rs 12,444 per 10 grams. Prices rose to a high of Rs 12,563 per 10 grams and fell to a low of Rs 12,260 per 10 grams during the day’s trading.

At the MCX, silver prices for July delivery closed Rs 16 (0.06%) lower at Rs 24,239/Kg. Prices opened at Rs 24,240/kg and fell to a low of Rs 23,675/Kg during the day’s trading.