Bullion metals continue to gather rust

Retreating crude prices coupled with strong dollar turn gold and silver prices pale

Bullion metals ended considerably lower on Wednesday, 03 September, 2008 after crude prices continued to retreat back on news that hurricane Gustav will not hit the oil rigs at the Gulf of Mexico. Prices also slipped after the dollar strengthened. These factors reduced the precious metal’s appeal as a hedge against inflation.

On Tuesday, Comex Gold for December delivery fell $2.3 (0.4%) to close at $808.2 an ounce on the New York Mercantile Exchange. On 17 March, 2008 prices had skyrocketed to a high of $1,034/ounce. But prices have dropped significantly since then.

This year, gold prices have lost 3.7% till date as the dollar rallied against the euro. Gold had lost 8.8% in August, 2008. In July, 2008, it ended 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 Wednesday, Comex silver futures for December delivery fell 20 cents (1.5%) to $12.95 an ounce. Silver has lost almost 13.5% in 2008 till date. It ended August with a loss of 2.4% and 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 crude market on Wednesday, crude-oil futures for October fell for fifth straight day. It fell by $0.36 (0.3%) to $109.35 a barrel. Commodities tumbled the most since March yesterday, led by energy prices, as Hurricane Gustav spared U.S. Gulf petroleum rigs the destruction caused by Katrina and Rita in 2005.

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 Wednesday, the euro fell to its lowest level since January against the dollar, notching a low of $1.4384 against the greenback earlier in the session. The British pound continued its rapid descent against the dollar, testing levels unseen since April 2006. The dollar index, gained 0.2% to 78.19. The greenback and gold tend to move in the opposite direction.

Among economic news of the day at Wall Street, The Commerce Department reported that factory orders remained surprisingly strong, with the fifth straight month of positive growth. July factory orders rose 1.3%. Excluding transportation, orders rose 1%. In addition, unfilled orders were up 0.7%, marking the 29th increase in the last 30 months, and indicating that manufacturing sector will remain busy. Orders in June were revised higher to 2.1% from 1.7%.

But elsewhere, The Fed's Beige Book, a collection of anecdotal economic reports from the 12 Federal Reserve districts, showed an economic slowdown in most districts. At the same time, most districts continued to report price pressures due to the elevated costs of energy, food and other commodities. Wage pricing pressures were moderate, as the sluggish economic environment has allowed businesses to limit their salary increases.

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%.