A deep plunge for bullion metals

Gold and silver erase all of their gains for the year till date

Strong US dollar and sliding crude prices sent bullion metal prices to their lowest levels in almost a year today, Monday, 11 August, 2008. Gold and silver prices had also registered sufficient losses last week. 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. 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 and vice versa.

Comex Gold for December delivery fell $36.5 (4.2%) to close at $828.3 ounce on the New York Mercantile Exchange. It fell to an intra day low price of $824.5. Last week, it ended lower by 5.8%. On 17 March, 2008 prices had skyrocketed to a high of $1,034/ounce. But prices have dropped 20% since then.

This year, gold prices have lost 1.2% till date as the dollar rallied against the euro. In August, 2008 itself, gold has shed its glaze in each trading session. It has lost almost $95 in August till now. 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 Monday, Comex silver futures for September delivery fell 71 cents (4.6%) to $14.62 an ounce. With today’s drop silver erased all of its gains and has lost almost 2% in 2008 till date. Last week it lost 12.5%. 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 Monday, the dollar extended its last week rally against the euro. The dollar index which measures the U.S. dollar against a basket of major currencies, rose to 76.25, up from 75.82 in during last Friday. A combination of factors drove the dollar's rise last week, such as the European Central Bank admitting weakness in the euro-zone economy.

At the crude market on Monday, crude oil fell and closed below the $115/barrel level for the first time in three months. Crude oil fell to a 14-week low on signs that the U.S. economic slump will extend into 2009, crimping fuel demand. Crude oil for September delivery fell 75 cents (0.7%) to settle at $114.45 a barrel.

Earlier this year, the weakening dollar and higher global demand for raw materials had led to records this year for commodities including gold.

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 446 (3.8%) at Rs 11,395 per 10 grams. Prices rose to a high of Rs 11,938 per 10 grams and fell to a low of Rs 11,305 per 10 grams during the day’s trading.

At the MCX, silver prices for September delivery closed Rs 827 (3.8%) lower at Rs 20,816/Kg. Prices opened at Rs 21,819/kg and fell to a low of Rs 20,714/Kg during the day’s trading.