Bullion metals turn very pale

Strong dollar and weak oil price hammer precious metals

Bullion metals ended substantially lower on Monday, 12 January, 2009 as the dollar strengthened and also due to the weak crude oil price. 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 Monday, Comex Gold for February delivery fell $34 (3.9%) to close at $821 an ounce on the New York Mercantile Exchange. Last week, gold prices ended down by 2.8%. This year gold has lost 7.7% till date. On 17 March, 2008 prices had skyrocketed to a high of $1,034/ounce. But prices have dropped significantly (20.5%) since then.

On Monday, Comex silver futures for March delivery fell by 57 cents (5%) to $11.32 an ounce. Last week, silver has gained 13 cents. For 2008, silver lost 24%.

At the currency market on Monday, the dollar was up against most major counterparts.Tthe U.S. dollar rose against the euro on expectations that the European Central Bank will cut its key interest rate later this week. The ECB's key lending rate stands at 2.5%.

In the crude market on Friday, crude prices fell by more than 7% to close below $38/barrel.

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 334 (2.4%) at Rs 12,994 per 10 grams. Prices rose to a high of Rs 13,316 per 10 grams and fell to a low of Rs 12,850 per 10 grams during the day's trading.

At the MCX, silver prices for March delivery closed Rs 387 (2.1%) lower at Rs 18,017/Kg. Prices opened at Rs 18,350/kg and fell to a low of Rs 17,903/Kg during the day's trading.