Precious metals end lower

Firm dollar turn precious metals pale

Gold prices ended lower on Thursday, 30 October, 2008. This was due to the dollar that remained relatively firm. Silver prices also fell today. A weak dollar increases the appeal of precious metals as a hedge against inflation and vice versa.

Earlier last week, gold prices had slipped to lowest levels in thirteen months as it fell below $700 level. 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 had also forced traders to sell gold. 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.

On Thursday, Comex Gold for December delivery fell $15.5 (2.1%) to close at $738.5 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 (29%) since then. Last week, gold prices ended lower by 7.3%.

This year, gold prices have lost 11.2% till date. The dollar index has gained 11.4% 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 fell marginally to $9.758 an ounce. Last week, silver fell 0.4%. Till date, silver has lost 30% 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 today, the U.S. dollar also changed course, erasing earlier losses and rising against the euro and the British pound. The dollar index, which tracks the value of the greenback against a basket of other major currencies, rose 1.2%.

Crude-oil futures closed with a loss of more than 2% today retreating from an earlier high above $70 a barrel as traders assess whether interest-rate cuts in the U.S. and China may help revive the global economy and spur energy demand. Crude for December delivery fell $1.54, or 2.3%, to close at $65.96 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. In the latest move, the Federal Reserve has cuts its target bank lending rate to 1% from 5.25% in September, 2007. The Fed did it in eight steps.

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%.