A dull day for bullion metals

Gold and silver drop on Friday but manage to gain for the week

The strong dollar and falling crude prices once again took their toll on bullion metals on Friday, 22 August, 2008 and both gold and silver losses for the day but gained for the week that ended on that day. Barring five sessions, gold and silver prices had registered losses in all the trading sessions in the current month of August, 2008. Silver prices also fell on Friday.

On Friday, Comex Gold for December delivery fell $5.5 (0.65%) to close at $833.5 an ounce on the New York Mercantile Exchange. It fell to an intra day low price of $828 earlier. For the week, the yellow metal ended higher by 5.2%. With Friday’s loss, gold has lost 9.1% in August, 2008 till date. On 17 March, 2008 prices had skyrocketed to a high of $1,034/ounce. But prices have dropped significantly (18.65%) since then.

This year, gold prices have lost a marginal 0.4% till date as the dollar rallied against the euro. It has lost almost $88 in August till now. Gold ended July, 2008 lower by $11 (1.1%).

Prior to that, 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 Friday, Comex silver futures for September delivery fell 25 cents (1.8%) to $13.477 an ounce. A day before silver registered largest one day gain in almost two years. With Friday’s loss today’s rise silver has lost almost 9% 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.

Gold and silver prices have dropped 19% and 33% from their all time highs that they reached earlier this 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 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.

At the currency markets on Friday, the U.S. dollar rose strongly mainly against the British pound. The pound lost ground after revised data showed the U.K. economy ground to a halt in the second quarter. The move aided a broad rebound by the dollar, which was also buoyed by falling crude-oil prices and a round of weak industrial new orders data for the euro zone. The dollar index, which measures the greenback against a trade-weighted basket of currencies, was at 76.81, up from 76.030 a day before.

Fed Chairman Ben Bernanke said on Friday that the declines in commodity prices and the stability of the dollar are encouraging as their trends are likely to slow inflation. He also stated that inflation will be further helped as the U.S. economy falls short of its growth potential for a time. Still, the inflation outlook is highly uncertain.

At the crude market on Friday, crude-oil futures dropped more than 5%, reversing the rally in the previous session, as a stronger U.S. dollar and ongoing concerns about a slowdown in demand pressured crude prices. Crude prices for October delivery closed at $114.59 (lower by $6.6 or 5.4%). For the week it managed to end higher by a little 0.6%. Prices also fell after tensions between Georgia and Russia eased a bit with the later pulling out its forces from Georgia borders.

Earlier this year, the weakening dollar and higher global demand for raw materials had led to records this year for commodities including gold. Gold reached a record in March as a U.S. housing slump and credit crisis spurred the Federal Reserve to slash borrowing costs. The Federal Reserve halted cuts to its target bank lending rate in April, after slicing it in seven steps to 2% from 5.25% in September.

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 6 (0.05%) at Rs 11,701 per 10 grams. Prices rose to a high of Rs 11,707 per 10 grams and fell to a low of Rs 11,653 per 10 grams during the day’s trading.

At the MCX, silver prices for September delivery closed Rs 63 (0.31%) lower at Rs 20,053/Kg. Prices opened at Rs 20,024/kg and fell to a low of Rs 19,951/Kg during the day’s trading.