Precious metals take a deep plunge

Gold prices slip by more than 2% while silver prices drop by more than 5%

After rising more than 3% last week, precious metals ended lower for the third consecutive day on Thursday, 29 May, 2008 after the dollar strengthened against its rivals and a major sell-off was witnessed in the crude market. With today’s decline, gold fell to the lowest level in almost two weeks’ time.

The weakening dollar and higher global demand for raw materials have led to records this year for commodities including gold. Last week, crude oil's rally to a fresh record high above $133 a barrel had boosted the precious metal's appeal as an inflation hedge. Oil has doubled in the past year, fueling concern inflation will accelerate.

Comex Gold for August delivery fell $23.3 (2.5%) to close at $881.7 ounce on the New York Mercantile Exchange. 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 5.1% 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 89 cents (5.1%) to $16.52 an ounce. Silver has gained 11.1% 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.

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.

At the currency markets on Thursday, the dollar advanced the most in three weeks against the euro as the government said gross domestic product was stronger last quarter than initially estimated. The dollar climbed as much as 0.8% against a weighted basket of the euro, yen and four other major currencies. The dollar index, which tracks the greenback against a basket of six major currencies, was at 72.971, compared with 72.522 in the previous day.

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 Thursday, crude oil fell more than $4 a barrel, the biggest drop since March, on signs that record prices will prompt U.S. consumers to reduce fuel purchases and as the dollar rallied, diminishing oil's appeal as a hedge. Crude oil for July delivery fell $4.41 (3.4%) to settle at $126.62 a barrel.

At the MCX, gold prices for June delivery closed lower by Rs 357 (2.9%) at Rs 12,087 per 10 grams. Prices rose to a high of Rs 12,443 per 10 grams and fell to a low of Rs 12,033 per 10 grams during the day’s trading.

At the MCX, silver prices for July delivery closed Rs 1,102 (4.5%) lower at Rs 23,137/Kg. Prices opened at Rs 24,152/kg and fell to a low of Rs 23,015/Kg during the day’s trading.