Bullion metals fall again

Higher demand for dollar plays the spoilsport for precious metals

After rising for the first time in this week yesterday, precious metals fell for the third time in this week today, Thursday, 12 June, 2008. The dollar strengthening against its rivals was the main reason as to why bullion metals once again slipped today. Crude prices too were trading lower earlier during the day before reversing their course of action while going into close. Since the start of this week, the dollar had strengthened and also following on and off comments from Federal Reserve Chairman, Ben Bernanke, precious metals had lost ground. The same have reduced the appeal of the precious metals as an inflation hedge. Silver prices also lost today.

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 August delivery fell $10.9 (1.2%) to close at $872 ounce on the New York Mercantile Exchange. Last week, gold prices ended higher by 0.8%. Last month, in May, it ended with a gain of higher by $22.5 (2.5%). On 17 March, 2008 prices had skyrocketed to a high of $1,034/ounce. But prices have dropped since then.

This year, gold prices have gained 4.3% till date against a 4.8% drop for the dollar against the euro. Before May, 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%.

On Thursday, Comex silver futures for July delivery fell 37 cents (2.2%) to $16.485 an ounce. Silver has gained 10.1% in 2008 till date. It finished 3.5% higher last week.

Silver prices ended the month of May 2008 with a gain of 2.7%. For April, it closed lower by 5.5%. Silver had 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 gained strength in the belief that a rebound in retail sales would back the case for the Federal Reserve to hike U.S. interest rates. The dollar index which tracks the greenback against major currency rivals, gained nearly 0.9% to 73.88.

The Commerce Department reported today an unexpected 1% rise in retail sales last month, marking the fastest increase in six months.

The weakening dollar and higher global demand for raw materials have led to records this year for commodities including gold. 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.

Since last September, Fed has axed interest rates seven times and brought it down to 2%. On the other hand, the ECB has kept rates unchanged at 4% since June, 2007.

Crude-oil futures also reversed course late in today’s trading session, fighting off pressure from strength in the U.S. dollar to finish modestly higher as traders continued to fret about the overall picture of tightening crude supplies. Crude for July delivery climbed 36 cents to close at $136.74 a barrel on the New York Mercantile Exchange, near the day's peak of $137.05.

Gold had 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%.

At the MCX, gold prices for August delivery closed lower by Rs 133 (1.1%) at Rs 12,108 per 10 grams. Prices rose to a high of Rs 12,211 per 10 grams and fell to a low of Rs 11,923 per 10 grams during the day’s trading.

At the MCX, silver prices for July delivery closed Rs 406 (1.7%) lower at Rs 23,425/Kg. Prices opened at Rs 23,770/kg and fell to a low of Rs 23,005/Kg during the day’s trading.