Marginal gain for precious metals

Gold prices still remain below $900 level

Precious metals ended little higher on Monday, 02 June, 2008. A sell-off in the US stock market prompted the rise in the bullion metal prices. But nevertheless, gold prices ended below $900/ounce.

Comex Gold for August delivery rose $5.5 (0.5%) to close at $897 ounce on the New York Mercantile Exchange. It fell to an intra day low of $890. Lst 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.

During May, overall strength in the U.S. dollar and recent declines in oil prices in last week helped to dull investment appeal for the precious metal, which is often used as a hedge against inflation.

This year, gold prices have gained 7% for the 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 4 cents (0.04%) to $16.91 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.

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.

At the currency markets on Monday, the dollar got a lift after U.S. manufacturing data were better than expected. The Institute for Supply Management's index for May improved to 49.6% from 48.6% in April, and came in above the 48.7% consensus expectation. But the dollar weakened on the heels of a decline in the broader U.S. stock market and stronger oil prices. Against this backdrop, the dollar index, which tracks the greenback against a basket of six major currencies, was at 72.910 as against previous closing of 73.107.

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 ended little higher as demand concerns eased partly after the manufacturing report.

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%.

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.

At the MCX, gold prices for June delivery closed higher by Rs 91 (0.75%) at Rs 12,290 per 10 grams. Prices rose to a high of Rs 12,358 per 10 grams and fell to a low of Rs 12,040 per 10 grams during the day’s trading.

At the MCX, silver prices for July delivery closed Rs 89 (0.4%) higher at Rs 23,465/Kg. Prices opened at Rs 23,245/kg and rose to a high of Rs 23,530/Kg during the day’s trading.