Crude continues to tarnish bullion metal prices

Bullion metals prices drop the maximum in three weeks

Lower crude price once again pressured bullion metals today, Wednesday, 16 July, 2008 as the energy prices continued to drop for the second straight day. A rebound in the US dollar also added further impact. The increase in energy costs generally increases demand for the precious metal as a hedge against inflation and vice versa. Silver prices fell for the day.

Comex Gold for August delivery fell $16 (1.65%) to close at $962.7 ounce on the New York Mercantile Exchange. Prices fell to a low of $959 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.

Today, Comex silver futures for September delivery fell 20.8 cents (1.1%) to $18.805 an ounce. Silver has gained 27% in 2008 till date. For the second quarter, it gained a paltry 1.4%.

At the currency markets on Wednesday, the dollar reversed sharp losses taking support from better-than-expected U.S. output data, strength on Wall Street and sagging crude-oil futures. The dollar index which tracks the performance of the greenback against a basket of other currencies, rose 0.3% to 71.98.

The Labor Department reported today that prices paid by U.S. consumers jumped 1.1% in June after a 0.6% gain the prior month.

In the crude market on Wednesday, crude-oil futures dropped as much as 4.9% to $132 a barrel in New York after a U.S. government report showed an unexpected increase in inventories. Crude is down more than $12 from the July 11 record of $147.27. It shed almost $11 in the past two sessions.

In the Wall Street yesterday, Federal Reserve Chairman Ben Bernanke said that the U.S. economy is facing "significant" risks to growth. On the other hand, Oganization of the Petroleum Exporting Countries also lowered its forecast for world oil-demand growth for 2008 and 2009.

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 47% and 87% since the past one year.

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 15% till date against a 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%.

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 lower by Rs 195 (1.4%) at Rs 13,365 per 10 grams. Prices rose to a high of Rs 13,640 per 10 grams and fell to a low of Rs 13,330 per 10 grams during the day's trading.

At the MCX, silver prices for September delivery closed Rs 264 (0.99%) lower at Rs 26,217/Kg. Prices opened at Rs 26,401/kg and fell to a low of Rs 26,104/Kg during the day's trading.