Bright day for precious metals

Gold and silver prices firm up as dollar index slips another 2%

Bullion metal prices rose sharply higher on Wednesday, 17 December, 2008. Bullion metals rose due to the falling dollar. The dollar fell despite the Fed cut interest rates by 75 bps to 0.25% yesterday. 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 and also vice versa.

On Wednesday, Comex Gold for February delivery rose $25.8 (3.1%) to close at $868.5 an ounce on the New York Mercantile Exchange. Earlier in the day, it reached a high of $883.6. Last week, gold gained 9%. On 17 March, 2008 prices had skyrocketed to a high of $1,034/ounce. But prices have dropped significantly (16.1%) since then.

For the month of November, gold prices ended higher by 14%. Prior to this, for the month of October, gold had ended lower by 18%. It was the biggest percentage loss for gold since February, 1983.

This year, gold prices have gained 3.6% till date. Futures have averaged $878 in 2008. The dollar index has gained 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 Wednesday, Comex silver futures for March delivery rose 71.5 cents (6.5%) to $11.42 an ounce. Last week, silver gained 80 cents (9%). For the month of November, silver prices had gained 5%. Till date, silver has lost 23% this year.

For the month of October, silver had slipped by 20%. 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.

At the currency market on Wednesday, the dollar extended its losses after the Fed decision yesterday, adding more upward pressures on gold prices. The dollar index fell as much as 2.7% after dropping 2% yesterday.

The Federal Reserve surprised market yesterday to save the U.S. economy slashing interest rates to just above zero and promising to try an array of new economic measures to stimulate spending. The central bank's Federal Open Market Committee established a target range for the federal funds rate of zero to 0.25%, effectively cutting its key rate for overnight lending to banks by between 0.75% and 1%.

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 0.25% from 5.25% in September, 2007. The Fed did it in nine 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 February delivery closed higher by Rs 238 (1.8%) at Rs 13,168 per 10 grams. Prices rose to a high of Rs 13,377 per 10 grams and fell to a low of Rs 12,934 per 10 grams during the day's trading.

At the MCX, silver prices for March delivery closed Rs 542 (3.1%) higher at Rs 18,097/Kg. Prices opened at Rs 17,643/kg and rose to a high of Rs 18,250/Kg during the day's trading.