Bullion rebounds

Speculation that European Central Bank will raise rate next month push precious metals higher

With crude price going up and the dollar slipping against its major rivals, bullion metals made their way up today, Wednesday, 11 June, 2008. The same factors had also sent yellow metal higher last week on Friday, 06 June, 2008. But since the start of this week, the dollar has strengthened following on and off comments from Federal Reserve Chairman, Ben Bernanke. The same has reduced the appeal of the precious metals as an inflation hedge. But silver prices also gained today.

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. 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 rose $11.7 (1.3%) to close at $882.9 ounce on the New York Mercantile Exchange. The metal had shredded more than 3% in the past two sessions. 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 5.5% till date against a 5% 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 Friday, Comex silver futures for July delivery rose 22 cents (1.3%) to $16.855 an ounce. Silver has gained 12.3% in 2008 till date. It finished 3.5% higher last week. But this week, before today, it had dropped by more than 3%.

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 Wednesday, the dollar fell against the euro on speculation the European Central Bank will raise interest rates in the next month, widening the gap in borrowing costs with the U.S. The dollar has gained 2% against the euro in the previous two sessions. The dollar index, which tracks the greenback against a basket of six major currencies, fell 0.6% to 73.19.

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.

A rebound in crude-oil prices today also helped gold rally as investors purchased the metal as a hedge against inflation. Crude-oil futures climbed as much as 5.3% today to $138.30 a barrel after dropping 2.3% yesterday. As oil prices continue to rise, gold becomes more appealing as a hedge against oil-generated inflation.

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%.

At the MCX, gold prices for August delivery closed higher by Rs 123 (1%) at Rs 12,241 per 10 grams. Prices rose to a high of Rs 12,256 per 10 grams and fell to a low of Rs 12,093 per 10 grams during the day’s trading.

At the MCX, silver prices for July delivery closed Rs 394 (1.7%) higher at Rs 23,831/Kg. Prices opened at Rs 23,430/kg and rose to a high of Rs 23,890/Kg during the day’s trading.