Bullion metals turn further pale

Gold gives up more than $36 in last three sessions

Bullion metal prices registered substantial losses for the third straight day on Tuesday, 05 August, 2008 after the crude prices slipped by almost $3 and US dollar strengthened. These factors reduce the appeal of the precious metal as a hedge against inflation. Gold prices have thus given up almost $36 in its last three sessions. 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 December delivery fell $21.8 (2.4%) to close at $886.1 ounce on the New York Mercantile Exchange. It rose to an intraday high price of $903 earlier. Last week, it ended lower by 2.1%. 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 6% till date against a 8% drop for the dollar against the euro. Gold ended July, 2008 lower by $11 (1.1%). The yellow metal ended second quarter with a marginal gain of 0.7%. It ended June, 2008 with a gain of 4.1%. In May, it ended with a gain of higher by $22.5 (2.5%). Before May, in 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%.

On Tuesday, Comex silver futures for September delivery fell 56.8 cents (3.3%) to $16.572 an ounce. Silver has gained 12% in 2008 till date. It ended July 2008 with a gain of 3%. For the second quarter, it had gained a paltry 1.4%. Silver had gained 16% in Q1. The metal also had gained for seven straight years.

At the currency markets on Tuesday, the dollar reached a seven-week high against the euro on speculation that the Federal Reserve will raise its benchmark interest rate later this year to contain inflation. Fed kept the interest rate unchanged at 2% today. The dollar index, a measure of the greenback against a trade-weighted currency basket, was at 73.92, against last closing of 73.485.

Today, The Federal Open Market Committee (FOMC) left the fed funds rate at 2%, and the discount rate at 2.25%, as expected. The Fed noted that there are both risks to inflation and growth. The FOMC said that although the economy grew in the second quarter, labor markets have "softened further" and financial markets remain under "considerable stress." The Fed gave no sign that it plans to change policy in the foreseeable future.

At the crude market on Tuesday, crude oil fell, closing below $120 a barrel for the first time in three months, amid signs demand may be curtailed by slowdowns in the U.S. and European economies. Gasoline also fell to the lowest since May. Crude oil for September delivery fell $2.24 (1.8%) to settle at $119.17 a barrel.

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 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. Silver had climbed 16% in FY 2007. In 2006, silver had jumped 46% while gold gained 23%.

At the MCX, gold prices for October delivery closed lower by Rs 257 (2.1%) at Rs 12,163 per 10 grams. Prices rose to a high of Rs 12,379 per 10 grams and fell to a low of Rs 12,125 per 10 grams during the day’s trading.

At the MCX, silver prices for September delivery closed Rs 588 (2.4%) lower at Rs 23,392/Kg. Prices opened at Rs 23,901/kg and fell to a low of Rs 23,315/Kg during the day’s trading.