Largest drop for bullion metals in two months

Gold and silver prices witness large fall as the dollar strengthens on no more interest rate cut hopes

With dropping crude price and the strong dollar, bullion metal prices dropped the most in two months. Rallying crude oil prices and the lower dollar 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. Silver prices also dropped 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.

Comex Gold for August delivery fell $26.9 (3%) to close at $871.2 ounce on the New York Mercantile Exchange. It was gold’s largest one day drop in almost two months time. 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 4.2% till date against a 6.3% 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 fell by 57.5 cents (3.3%) to $16.635 an ounce. Silver has gained 11% 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 Tuesday, the dollar index, a weighted measure against the euro, yen, pound and three other major currencies, jumped 1.1%. Federal Reserve Chairman Ben S. Bernanke said risks to the economy have faded, spurring speculation that interest rates will rise.

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 on Tuesday, crude-oil futures closed with a loss of more than 2% retreating from a high above $137 a barrel after monthly reports implied that recent record prices as well as weak economies may be causing declines in global and domestic demand growth. Prices closed around $131, dropping by more than $3/barrel.

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 312 (2.5%) at Rs 12,118 per 10 grams. Prices rose to a high of Rs 12,399 per 10 grams and fell to a low of Rs 12,060 per 10 grams during the day’s trading.

At the MCX, silver prices for July delivery closed Rs 740 (3.1%) lower at Rs 23,437/Kg. Prices opened at Rs 24,080/kg and fell to a low of Rs 23,311/Kg during the day’s trading.