Gold rises as crude rises

Missile tests by Iran and surging crude price makes gold a bet for safe haven

The weak US dollar and the rising oil price pushed bullion metals higher on Friday, 11 July, 2008. Prices rose as tension once again mounted at Middle East and the also rose on reports of more missile tests by Iran. 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.

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 rose $18.6 (1.97%) to close at $960.6 ounce on the New York Mercantile Exchange. Prices climbed to a high of $967 during intra day trading. For the 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 on Friday that 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 Friday, the dollar lost ground against other major currencies on rising geopolitical risk and renewed credit worries. The dollar index which tracks the greenback against a basket of major currencies, fell 0.6% to stand lately at 72.03.

In the crude market on Friday, prices fell initially amid a rising dollar but leaped right back on speculation that Israel may be nearer to launching an attack on Iran and on worries that supplies in Nigeria and Brazil may be disrupted. Crude for August delivery closed up $3.43 or 2.4%, at $145.08 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.

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 13.5% till date against a 5.6% 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 Friday, Comex silver futures for September delivery gained 50 cents (2.7%) to $18.82 an ounce. Silver has gained 25% 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.