A dull day for bullion metals

Federal Reserve Chairman’s comments take away glitter from precious metals

Precious metals registered drastic drop on Tuesday, 03 June, 2008. The strengthening of the dollar was the main reason behind the fall in prices of bullion metals. The dollar rallied today after Federal Reserve Chairman Ben Bernanke signaled he's finished cutting U.S. borrowing costs for now thereby boosting the dollar and thus eroding the appeal of precious metals as alternative investments. A drop in energy costs also eroded demand for the precious metals as a hedge against inflation.

Comex Gold for August delivery fell $11.5 (1.3%) to close at $885.3 ounce on the New York Mercantile Exchange. It fell to an intra day low of $878. Last week, gold prices ended lower by 4.2%. But for the month of 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 5.7% for the till date against a 6.5% 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 Monday, Comex silver futures for July delivery fell 7 cents (0.05%) to $16.84 an ounce. Silver has gained 13.6% in 2008 till date. It finished 7.5% lower 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 Tuesday, the dollar bounced firmly higher. The dollar index, which tracks the greenback against a basket of six major currencies, was at 73.317, compared with 72.72 before Bernanke's morning speech.

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 energy market today, crude price fell below $125 a barrel to close at their lowest level in nearly three weeks, pressured by a rally in the U.S. dollar as traders turned their attention toward the Atlantic hurricane season and natural gas, lifting prices for that commodity by as much as 3%. Crude for July delivery fell $3.45 (2.7%) to finish at $124.31 a barrel on the New York Mercantile Exchange.

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.

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.

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 lower by Rs 111 (0.9%) at Rs 12,142 per 10 grams. Prices rose to a high of Rs 12,320 per 10 grams and fell to a low of Rs 12,059 per 10 grams during the day’s trading.

At the MCX, silver prices for July delivery closed Rs 52 (0.22%) lower at Rs 23,413/Kg. Prices opened at Rs 23,430/kg and fell to a low of Rs 23,000/Kg during the day’s trading.