Search Now

Recommendations

Wednesday, July 16, 2008

Crude pressures bullion metals


Bullion metals witness extreme volatility but end mixed

Lower crude price pressured bullion metals today, Tuesday, 15 July, 2008 as the energy prices witnessed greatest one day drop in seventeen years. 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 rose $5 (0.65%) to close at $978.7 ounce on the New York Mercantile Exchange. Prices climbed to a high of $988.6 during intra day trading and also fell to a low of $969.3. 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.

On Tuesday, Comex silver futures for September delivery fell 24 cents (1.1%) to $19.01 an ounce. Silver has gained 28% in 2008 till date. For the second quarter, it gained a paltry 1.4%.

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

At the currency markets on Tuesday, the dollar got some support from falling crude-oil futures but remained under pressure retreating after Bernanke cited downside risks to economic growth in a speech that followed a spate of lackluster data. The dollar dropped to a new low against the euro earlier, before Bernanke spoke on Capitol Hill. The dollar index which measures the greenback against a basket of six major currencies, fell 0.4% to 71.73.

In the crude market on Tuesday, crude futures closed down more than $6 a barrel, the biggest daily drop in more than 17 years, as concerns that slowing economic growth will dampen oil demand triggered a broad sell-off in energy commodities. Crude futures for August delivery ended at $138.74 a barrel on the Nymex, down 4.4%, or $6.44, the biggest one-day drop in price for a front-month contract since January, 1991. Earlier, the contract slumped $9.26, or 6.3%, to an intraday low of $135.92.

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 16.7% till date against a 5.2% 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 higher by Rs 78 (0.6%) at Rs 13,560 per 10 grams. Prices rose to a high of Rs 13,764 per 10 grams and fell to a low of Rs 13,475 per 10 grams during the day’s trading.

At the MCX, silver prices for September delivery closed Rs 228 (0.85%) lower at Rs 26,481/Kg. Prices opened at Rs 26,700/kg and fell to a low of Rs 26,175/Kg during the day’s trading.