Gold drops , silver gains, crude rallies

Gold prices continue to slip and silver gains though dollar drops and crude rallies

Despite a drop in the dollar and rallying crude prices, yellow metal ended lower today, Thursday, 05 June, 2008. Precious metals bucked the normal trend today. But going into close, prices pared some of their losses. In the last few days, recent strength in the dollar as well as recent weakness in oil had combined to dull investment demand for gold, which is often used as a hedge against inflation. Gold has coughed up almost $22 in the past three trading sessions. But silver prices finished higher for the day.

Comex Gold for August delivery fell $8.3 (0.93%) to close at $875.5 ounce on the New York Mercantile Exchange. It fell to an intra day low of $869. 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 4.6% till date against a 6.8% 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 Monday, Comex silver futures for July delivery rose 23 cents (1.3%) to $17.17 an ounce. Silver has gained 15.5% 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 Thursday, the dollar came under severe pressure, especially against the euro, after European Central Bank President Jean-Claude Trichet said a small increase in interest rates next month is possible. The dollar index, which tracks the greenback against a basket of six major currencies, was at 73.054, down from 73.469.

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 futures rallied by more than $5 a barrel, rebounding from Wednesday's drop to their lowest level in a month.

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 28 (0.2%) at Rs 12,173 per 10 grams. Prices rose to a high of Rs 12,222 per 10 grams and fell to a low of Rs 12,012 per 10 grams during the day’s trading.

At the MCX, silver prices for July delivery closed Rs 399 (1.7%) higher at Rs 23,976/Kg. Prices opened at Rs 23,560/kg and rose to a high of Rs 24,037/Kg during the day’s trading.