Bullion metals continue to rise

Gold gains more than $50 in the past two days

Despite a relatively stronger dollar, bullion metals continued to rise and once again ended higher on Tuesday, 07 October, 2008. The yellow metal gained after the stocks at Wall Street continued to plunge on global economic worries thereby strengthening the yellow metal’s demand as a safe haven for investment. Chances of another interest rate cut by Federal Reserve by at least 50 bps to 1.5% also imparted further shine on the yellow metal. Silver prices also gained today. Investors tend to seek safety in gold when the economy falls into turmoil.

On Tuesday, Comex Gold for December delivery gained $15.8 (1.8%) to close at $882 an ounce on the New York Mercantile Exchange. In the past two days, gold has gained more than $50. On 17 March, 2008 prices had skyrocketed to a high of $1,034/ounce. But prices have dropped significantly since then.

For the third quarter ended September, 2008, gold prices ended lower by 5.1%. It was the first quarterly loss for the yellow metal since the second quarter in FY 2007. Prior to that, the yellow metal ended second quarter with a marginal gain of 0.7%. For first quarter prices gained 10.7%. This year, gold prices have gained 5.3% till date.

On Tuesday, Comex silver futures for December delivery slightly rose 9.5 cents (0.8%) to $11.38 an ounce. Silver had ended month and quarter of September 2008 with a loss of 10%. 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. Till date, silver has lost 24% this year. The metal also had gained for seven straight years.

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 Tuesday, the dollar gained against the yen but remained under pressure after the Federal Reserve said it would buy commercial paper in an attempt to revive frozen credit markets and ease overall borrowing costs. The yen rallied against both the dollar and the euro as investors fled to safe-haven currencies on ongoing worries about credit markets and the impact of the financial crisis on institutions in the U.S. and Europe. The dollar index, which measures the U.S. unit against a basket of major currencies, remained under pressure, trading at 81.093, down from 81.300 in morning trade and 81.593 on late Monday.

At the crude market on Tuesday, crude-oil futures closed higher to score their first gain in five sessions as prices bounced back after touching an eight-month low. Prices found support as traders looked for fresh indications on global energy demand and digested reports of renewed tension in the Middle East, but crude finished off the day's high as U.S. stocks weakened. Crude for November delivery rose $2.25, or 2.6%, to close at $90.06 a barrel on the New York Mercantile Exchange.

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 December delivery closed higher by Rs 177 (1.3%) at Rs 13,513 per 10 grams. Prices rose to a high of Rs 13,599 per 10 grams and fell to a low of Rs 13,192 per 10 grams during the day’s trading.

At the MCX, silver prices for December delivery closed Rs 157 (0.82%) higher at Rs 19,585/Kg. Prices opened at Rs 19,007/kg and rose to a high of Rs 19,585/Kg during the day’s trading.