Bullion metals fall with strong dollar

Gold registers first quarterly drop in almost a year

Bullion metals ended considerably lower on Tuesday, 30 September, 2008 after dollar rallied against the euro and other major currencies reducing the precious metal’s appeal as a hedge against inflation. Silver prices also declined. With today’s fall, gold also registered the first quarterly drop in price in almost a year.

On Tuesday, Comex Gold for December delivery fell $13.6 (1.5%) to close at $880.8 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.

Gold prices ended 5.5% higher this month of September, 08. Prior to this, gold had lost 8.8% in August, 2008. In July, 2008, it ended lower by $11 (1.1%). For the year, gold has gained 6.3% till date in FY 2008.

For the third quarter that ended today, 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%.

On Tuesday, Comex silver futures for December delivery fell 75 cents (5.8%) to $12.275 an ounce. Silver 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 gained 7.4% 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 climbed the most ever against the 15-nation European currency as France and Belgium led a state-backed rescue of Dexia SA, the world's biggest lender to local governments. Major U.S. equity indexes rebounded from the worst plunge since October 1987 after lawmakers sought to repair a $700 billion financial rescue plan voted down yesterday.

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 lower by Rs 288 (2.1%) at Rs 13,272 per 10 grams. Prices rose to a high of Rs 13,690 per 10 grams and fell to a low of Rs 13,235 per 10 grams during the day’s trading.

At the MCX, silver prices for December delivery closed Rs 847 (4.04%) lower at Rs 20,109/Kg. Prices opened at Rs 21,000/kg and fell to a low of Rs 20,019/Kg during the day’s trading.