Another dull day for bullion metals

Lower crude price and rebounding dollar continue to weaken precious metals

Lower crude prices and rebound in the US dollar led to lower bullion metal prices once again today, Wednesday, 23 July, 2008. Gold prices fell the modt in almost six weeks. The factors reduced precious metals’ appeal against a hedge against inflation. Going economic concerns about the current health of the US economy had been increasing the metal’s demand as a safe asset against the rising inflation in recent times. Silver prices also fell for the day.

Comex Gold for August delivery fell $25.7 (2.7%) to close at $922.8 ounce on the New York Mercantile Exchange. Yesterday, gold prices had slipped by more than $15. Last week, it ended marginally lower by $2.6. 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 10.8% till date against a 10% drop for the dollar against the euro. Gold prices ended June, 2008 with a gain of 4.1%. The yellow metal ended second quarter with a marginal gain of 0.7%. In May, it ended with a gain of higher by $22.5 (2.5%). 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%.

Today, Comex silver futures for September delivery fell 54.7 cents (3%) to $17.458 an ounce. Silver has gained 18% in 2008 till date. For the second quarter, it gained a paltry 1.4%.

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.

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 Wednesday, the dollar index, a measure of the greenback against a trade-weighted basket of currencies, gained 0.4% to 72.74. The dollar was boosted by Philadelphia Federal Reserve Bank President Charles Plosser's comments that accommodative monetary policy needs to be reversed and that rate hikes will need to begin soon. Separately, Treasury Secretary Henry Paulson reaffirmed U.S. support for a strong dollar in a speech yesterday.

In the crude market on Wednesday, crude-oil futures slumped almost $4 retreating for a second day as Energy Department’s data showed U.S. inventories fell less than expected and as concerns faded that Hurricane Dolly would pose much of a threat to energy infrastructure in the Gulf of Mexico. Crude prices for September delivery fell $3.98 (3.1%) to settle at $124.44 a barrel.

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. Gold and oil has climbed 41% and 73% since the past one year.

During last week of June, Federal Reserve yesterday sharpened its focus on inflation, saying that the upside risks to inflation have increased. Fed held its target for short-term interest rates steady at 2%. Since last September, Fed has axed interest rates seven times and brought it down to 2%. On the other hand, after keeping interest rates unchanged at 4% since June, 2007, ECB hiked the same to 4.25% last month.

Gold had 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 430 (3.3%) at Rs 12,644 per 10 grams. Prices rose to a high of Rs 13,041 per 10 grams and fell to a low of Rs 12,590 per 10 grams during the day’s trading.

At the MCX, silver prices for September delivery closed Rs 710 (2.8%) lower at Rs 24,453/Kg. Prices opened at Rs 25,110/kg and fell to a low of Rs 24,290/Kg during the day’s trading.