Precious metals drop

Strong dollar decreases their appeal

Rising dollar decreased the appeal of the bullion metals and the same fell on Wednesday, 03 December, 2008. Gold and silver prices fell due to the strong dollar. 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 fell $12.8 (1.6%) to close at $770.5 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 (26%) since then. Last week, gold prices ended higher by 3.1%. 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 lost 8.4% till date. Futures have averaged $882 in 2008. The dollar index has gained 11% 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 fell 3 cents (0.3%) to $9.59 an ounce. Last week, silver gained 7.5%. For the month of November, silver prices gained 5%. Till date, silver has lost 34% 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 strengthened against the euro and the British pound on expectations for big rate cuts by the European Central Bank and the Bank of England.

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 February delivery closed lower by Rs 129 (1%) at Rs 12,478 per 10 grams. Prices rose to a high of Rs 12,627 per 10 grams and fell to a low of Rs 12,422 per 10 grams during the day's trading.

At the MCX, silver prices for March delivery closed Rs 72 (0.42%) lower at Rs 16,676/Kg. Prices opened at Rs 16,708/kg and fell to a low of Rs 16,488/Kg during the day's trading.