Bullion metals drop as dollar strengthens

Gold and silver prices continue to turn pale

After rising for three consecutive sessions, gold prices ended lower for second straight day on Wednesday, 28 January, 2009 as the dollar strengthened. Gold price also fell due to other lower commodity prices, especially crude oil.

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. But silver prices dropped.

On Tuesday, Comex Gold for February delivery fell $11.3 (1.3%) to close at $888.2 an ounce on the New York Mercantile Exchange. Last week, gold prices ended higher by 6.7%. This year gold has gained 1.2% till date. On 17 March, 2008 prices had skyrocketed to a high of $1,034/ounce. But prices have dropped significantly (14%) since then.

On Wednesday, Comex silver futures for March delivery fell 21.2 cents (1.7%) to end at $11.763 an ounce. For 2008, silver had lost 24%.

At the currency market on Wednesday, the dollar index, which tracks the dollar against a trade-weighted basket of six major currencies, continued to rise even after the Fed meeting. The dollar index rose 1% today.

Today, The Federal Open Market Committee kept its interest rate target in a range of zero to 0.25%, as expected. It said it would continue to flood the financial system with money. Regarding the economy, the Fed admitted that the economy was in worse shape than in its prior meeting in December. But a gradual recovery will begin later this year. The central bank stressed that deflation was the biggest concern

In 2008, gold prices ended higher by 5.5%. The dollar index had gained 12% that year.

Last year, the weakening dollar and higher global demand for raw materials had led to records for commodities including gold. Gold reached a record in March 2008 as a U.S. housing slump and credit crisis spurred the Federal Reserve to slash borrowing costs. In the last 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.

Prior to 2008, 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 196 (1.4%) at Rs 13,877 per 10 grams. Prices rose to a high of Rs 14,055 per 10 grams and fell to a low of Rs 13,847 per 10 grams during the day's trading.

At the MCX, silver prices for March delivery closed Rs 206 (1.05%) lower at Rs 19,270/Kg. Prices opened at Rs 19,402/kg and fell to a low of Rs 19,131/Kg during the day's trading.