Gold continues to drop but silver rises marginally

Gold price drops below $700 for first time in thirteen months

Gold prices continued to drop on Thursday, 23 October, 2008. Gold prices slipped to lowest levels in thirteen months as it fell below $700 level today. A strong dollar was the main reason behind this. 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. Losses in equity markets also forced traders to sell gold today. Since past couple of weeks, precious metals, mainly gold, had dropped as traders tried to gain back some of the money that had lost in other markets. Silver prices gained marginally today.

On Thursday, Comex Gold for December delivery fell $20.5 (2.8%) to close at $714.7 an ounce on the New York Mercantile Exchange. Prices fell to a low of $695.5 earlier during the day. On 17 March, 2008 prices had skyrocketed to a high of $1,034/ounce. But prices have dropped significantly since then. Last week, gold prices ended lower by 8.3%.

This year, gold prices have lost 15.5% till date. The dollar index has gained 10.5% this year. 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%.

On Thursday, Comex silver futures for December delivery rose 4 cents (0.4%) to $9.5 an ounce. Last week, silver coughed up 12%. Till date, silver has lost 36.6% this year. Silver had ended month and quarter of September 2008 with a loss of 10%. 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.

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.

In the currency market on Thursday, the dollar slipped against major rivals as foreign exchange markets took their cue from volatile equities trading and rising risk appetite as U.S. blue chips managed to end a whipsaw session higher. The dollar index, a measure of the greenback against a trade-weighted basket of six major currencies, was at 85.056, down from 85.602 in late Wednesday.

In the crude market on Wednesday, crude prices fell by more than $5 and closed just above $66/barrel. EIA reported today that crude stockpiles for the week ended 17 October, 2008 rose 3.2 million barrels, which was larger than the expected increase of 2.7 million barrels. Gasoline stockpiles rose by 2.7 million barrels.

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 1.5% currently from 5.25% in September, 2007.

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 168 (1.4%) at Rs 11,716 per 10 grams. Prices rose to a high of Rs 11,936 per 10 grams and fell to a low of Rs 11,432 per 10 grams during the day’s trading.

At the MCX, silver prices for December delivery closed Rs 15 (0.08%) higher at Rs 17,169/Kg. Prices opened at Rs 17,101/kg and rose to a high of Rs 17,549/Kg during the day’s trading.