Precious metals turn dull

Firm dollar puts downward pressure on bullion metals

Gold prices ended little lower on Tuesday, 28 October, 2008. This was due to the dollar that remained relatively firm. Silver prices also dropped today.

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 Tuesday, Comex Gold for December delivery fell $2.4 (0.3%) to close at $740.5 an ounce on the New York Mercantile Exchange. Prices fell to a low of $724 and also rose to a high of $756 earlier during the day. 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 11.9% 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 Tuesday, Comex silver futures for December delivery fell 40 cents (4.4%) to $8.79 an ounce. Last week, silver fell 0.4%. Till date, silver has lost 42% 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 Tuesday, the dollar index, which tracks the value of the greenback against a basket of other major currencies, rose 0.5%.

In the crude market on Monday, crude for December delivery fell 49 cents, or 0.7%, to end at $62.73 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. 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. But there are chances that Fed might curtail the rate to 1% in its next meeting.

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 77 (0.63%) at Rs 11,965 per 10 grams. Prices rose to a high of Rs 12,099 per 10 grams and fell to a low of Rs 11,911 per 10 grams during the day’s trading.

At the MCX, silver prices for December delivery closed Rs 162 (0.98%) lower at Rs 16,286/Kg. Prices opened at Rs 16,355/kg and fell to a low of Rs 16,148/Kg during the day’s trading.