Bullion metals register marginal drop

Relatively strong US dollar continue to tarnish the image of precious metals

The relatively strong US dollar led bullion metals close marginally lower today, Thursday, 24 July, 2008. Yesterday, gold prices had dropped the most in almost six weeks. Lower crude price and rebound in US dollar had reduced precious metals’ appeal against a hedge against inflation and prices had lost almost $40 on past couple of days. Before that, 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.

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.

Comex Gold for August delivery fell $0.5 (0.5%) to close at $922.2 ounce on the New York Mercantile Exchange. 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 10.3% 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 16 cents (0.8%) to $17.3 an ounce. Silver has gained 17.2% in 2008 till date. For the second quarter, it had 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.

At the currency markets on Thursday, the greenback rallied sharply against the New Zealand dollar, or kiwi, after the Reserve Bank of New Zealand surprised markets by reducing its benchmark interest rate for the first time in five years. The dollar index, a measure of the greenback against a trade-weighted basket of currencies, rose to an intraday high of 73.02 by the close of metals trading, but it recently fell back 0.1% to 72.87.

In the crude market on Thursday, crude-oil futures rose for first time in three sessions, up 0.8% following their $20 decline over the past seven sessions that had sent the benchmark contract to its lowest level in seven weeks. Crude oil for September delivery gained $1.05, or 0.8%, to end at $125.49 a barrel on the Nymex.

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 36% and 66% 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 20 (0.15%) at Rs 12,624 per 10 grams. Prices rose to a high of Rs 12,708 per 10 grams and fell to a low of Rs 12,530 per 10 grams during the day’s trading.

At the MCX, silver prices for September delivery closed Rs 178 (0.7%) lower at Rs 24,275/Kg. Prices opened at Rs 24,400/kg and fell to a low of Rs 24,050/Kg during the day’s trading.