A bright day for bullion metals

Gold’s appeal as a safe investment tool increases further

Traders ran to acquire gold today, Monday, 14 July, 2008 as the metal’s appeal as a safe-haven increased all the more after tensions intensified at Middle East and also as the US Market continued to cripple with the financial crisis. Gold is typically seen as a safe-haven investment and its appeal increases during times of heightened geopolitical tensions. The increase in energy costs also generally increase demand for the precious metal as a hedge against inflation. Silver prices gained for the day.

Comex Gold for August delivery rose $13.1 (1.4%) to close at $973.7 ounce on the New York Mercantile Exchange. Prices climbed to a high of $975.2 during intra day trading. Last week, it ended higher by $27 (2.8%). On 17 March, 2008 prices had skyrocketed to a high of $1,034/ounce. But prices have dropped since then.

It was reported today that Israeli warplanes held maneuvers over Iraq, possibly preparing for a strike against Iran. Last week, Iran test fired more missiles on Thursday, after testing missiles the day before that could reach Israel. Iran is the world's fourth-largest exporter of crude oil.

At the currency markets on Monday, the dollar pared most of its gains as the government's weekend rescue of Fannie and Freddie highlighted fears about the U.S. financial sector. The dollar index which tracks the performance of the greenback against a basket of other major currencies, edged up 0.1% to 71.96.

In the crude market on Monday, crude oil was little changed amid concern that supplies from Brazil may be disrupted and as the dollar strengthened against the euro, reducing the appeal of commodities as a currency hedge for investors. Crude for August delivery settled up 10 cents at $145.18 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.

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%.

This year, gold prices have gained 16% till date against a 5.5% drop for the dollar against the euro. 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 September delivery gained 43 cents (2.3%) to $19.25 an ounce. Silver has gained 29% 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.

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 higher by Rs 129 (0.96%) at Rs 13,482 per 10 grams. Prices rose to a high of Rs 13,520 per 10 grams and fell to a low of Rs 13,245 per 10 grams during the day’s trading.

At the MCX, silver prices for September delivery closed Rs 451 (1.7%) higher at Rs 26,709/Kg. Prices opened at Rs 26,220/kg and rose to a high of Rs 26,848/Kg during the day’s trading.