Precious metals end sharply higher

Rate cut pressures dollar down thereby making bullion metals shine

Gold prices ended higher on Wednesday, 29 October, 2008. This was due to the dollar that remained relatively weak. Silver prices also rose today. A weak dollar increases the appeal of precious metals as a hedge against inflation.

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 Wednesday, Comex Gold for December delivery rose $13.5 (1.8%) to close at $755 an ounce on the New York Mercantile Exchange. Prices rose to a high of $775.3 earlier during the day. On 17 March, 2008 prices had skyrocketed to a high of $1,034/ounce. But prices have dropped significantly (27%) since then. Last week, gold prices ended lower by 7.3%.

This year, gold prices have lost 9.1% till date. The dollar index has gained 10.2% 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 Wednesday, Comex silver futures for December delivery rose $1.1015 cents (12%) to $9.805 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 on Wednesday, the dollar index, a measure of dollar against a basket of six major currencies, tumbled as much as 2.8%. Expectations about an interest rate cut by Fed weakened the dollar today.

In the crude market on Wednesday, crude for December delivery rose by almost $5 to end at $67.5 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%.

At the MCX, gold prices for December delivery closed higher by Rs 212 (1.8%) at Rs 12,177 per 10 grams. Prices rose to a high of Rs 12,370 per 10 grams and fell to a low of Rs 11,931 per 10 grams during the day’s trading.

At the MCX, silver prices for December delivery closed Rs 849 (5.2%) higher at Rs 17,135/Kg. Prices opened at Rs 16,350/kg and rose to a high of Rs 17,315/Kg during the day’s trading.