Gold drops but silver rises

Strong dollar pushes yellow metal further down

Gold prices dropped on Tuesday, 21 October, 2008 as other commodity prices like oil also slipped down. 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. During the last week, precious metals, mainly gold, had dropped as traders tried to gain back some of the money that had lost in other markets. But silver prices rose today.

On Tuesday, Comex Gold for December delivery fell $22 (2.8%) to close at $768 an ounce on the New York Mercantile Exchange. Prices fell to a low of $766.4 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 8.4% till date. 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 Tuesday, Comex silver futures for December delivery rose 38.5 cents (4%) to $10.075 an ounce. Last week, silver coughed up 12%. Till date, silver has lost 32% 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.

In the crude market on Tuesday, Monday, crude prices fell by more than 5% and closed just above $70/barrel as OPEC hinted at a production cut at its 24 October, 2008 meeting due to the current low prices of crude.

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 Tuesday, the dollar rose to the highest level in 20 months against the euro, as investors focused on the U.S. financial rescue package and further stimulus hoped to provide a needed boost to the economy. The dollar index, the weighted basket of six major currencies, climbed to the highest since March 2007. The dollar rose to a 19-month high against the euro on bets that the European Central Bank will cut borrowing costs at a faster pace than the Federal Reserve.

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 280 (2.25%) at Rs 12,370 per 10 grams. Prices rose to a high of Rs 12,748 per 10 grams and fell to a low of Rs 12,307 per 10 grams during the day’s trading.

At the MCX, silver prices for December delivery closed Rs 157 (0.9%) higher at Rs 17,704/Kg. Prices opened at Rs 17,640/kg and rose to a high of Rs 17,750/Kg during the day’s trading.