Bullion metals register big drop

Strong dollar pushes precious metals to lowest levels in two weeks

Bullion metals ended lower on Thursday, 02 October, 2008. The yellow metal dropped today after the dollar strengthened once the US Senate passed the revised $700 bailout plan. Silver prices also fell today.

On Thursday, Comex Gold for December delivery lost $43 (4.8%) to close at $844.3 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 for 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 lost 2.9% till date in FY 2008.

For the third quarter, 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 Thursday, Comex silver futures for December delivery fell $1.65 (12.9%) to $11.12 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 7% 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 Thursday, the dollar strengthened after the Senate approved the revised plan on Wednesday night to stabilize the financial industry, just two days after the House of Representatives rejected the original package. By a vote of 74-25, senators authorized the Treasury Secretary to buy bad assets from companies' books, allowed the Federal Deposit Insurance Corp (FDIC) to raise its deposit-insurance cap to $250,000 from $100,000, extended several tax breaks and required government agencies to modify troubled mortgages.

The dollar rose against the euro, and the British pound. The dollar index, which tracks the value of the greenback against other major currencies, rose 1.2%.

Among economic news of the day at Wall Street, the Commerce Department at US reported today, Thursday, 02 October, 2008 that demand for U.S. factory goods dropped at the fastest rate in two years in August, 2008. The drop was due to the much lower orders for metals, machinery and vehicles. Factory orders fell 4%, worse than the 3% drop expected. Actual Orders had risen 0.7% in July, revised down from the 1.3% estimate given a month ago.

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%.