Rebounding dollar pushes precious metals down

Precious metals prices drop as crude slips by more than $2 and dollar goes up

After being on a roll for the last few days, precious metal prices dropped today, Thursday, 22 May, 2008 after crude oil prices eased and the dollar once again rebounded against the rivals. The dual effect took some glitter off the precious metals today. Ealier this 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 $10.3 (1.1%) to close at $918.3 ounce on the New York Mercantile Exchange. During intra day trading, prices touched a high of $935.4/ounce. Last week, gold prices ended higher by $14 (1.6%). On 17 March, 2008 prices had skyrocketed to a high of $1,034/ounce. Prices have dropped by 10.2% since then.

This year, gold prices have gained 9.6% for the till date against a 7.6% 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 2.5 cents (0.2%) to $18.025 an ounce. Silver has gained 20.7% 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 Thursday, the dollar rose on speculation the Federal Reserve will raise borrowing costs by the end of the year to curb inflation. The dollar also got a lift against major rivals after better-than-expected weekly jobs data. The dollar index, which tracks the performance of the greenback against a basket of other major currencies, rose 0.4% to 72.18.

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 Labor Department reported that first-time claims for state unemployment benefits fell back in the latest week, dropping by 9,000 to 365,000 on a seasonally adjusted basis.

In the crude market today, oil futures dropped as much as 2.3% to $130.07 a barrel after earlier reaching a record $135.09. Yesterday, crude-oil futures climbed past $133 a barrel to close at another record level after government data showed that crude supplies unexpectedly dropped, marking their first decline in five weeks. It touched an all-time peak of $133.35.

Earlier during the week, crude oil rose after billionaire hedge-fund manager Boone Pickens said prices will reach $150 a barrel this year as demand outpaces supply. Last week, crude-oil futures rallied to a fresh record high near $128 a barrel as Goldman Sachs raised its second-half-of-the-year forecast for oil prices by 32% to $141.

At the MCX, gold prices for June delivery closed lower by Rs 96 (0.7%) at Rs 12,730 per 10 grams. Prices rose to a high of Rs 12,999 per 10 grams and fell to a low of Rs 12,710 per 10 grams during the day’s trading.

At the MCX, silver prices for July delivery closed Rs 30 (0.1%) lower at Rs 24,897/Kg. Prices opened at Rs 24,990/kg and fell to a low of Rs 24,666/Kg during the day’s trading.