Gold slumps as dollar strengthens

Gold prices drop below $900 mark

After rising for three consecutive sessions, gold prices ended lower on Tuesday, 27 January, 2009 as the dollar strengthened. Gold price also fell due to other lower commodity prices, especially crude oil. But silver prices gained

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 $9.3 (1%) to close at $899.5 an ounce on the New York Mercantile Exchange. Last week, gold prices ended higher by 6.7%. This year gold has gained 2.5% till date. On 17 March, 2008 prices had skyrocketed to a high of $1,034/ounce. But prices have dropped significantly (13%) since then.

On Tuesday, Comex silver futures for March delivery gained 6.5 cents (0.5%) to end at $12.175 an ounce. For 2008, silver had lost 24%.

At the currency market on Friday, the dollar index, which tracks the dollar against a trade-weighted basket of six major currencies, continued to rise even as consumer confidence continued to drop in the country.

The monthly Conference Board index reported today that consumer confidence hit a record low in January as worries worsened about future income. As per the report, the January consumer confidence index fell to 37.7 from an upwardly revised 38.6 in December. Market had expected a January reading of 38.

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 higher by Rs 23 (0.2%) at Rs 14,095 per 10 grams. Prices rose to a high of Rs 14,214 per 10 grams and fell to a low of Rs 13,956 per 10 grams during the day's trading.

At the MCX, silver prices for March delivery closed Rs 216 (1.1%) higher at Rs 19,476/Kg. Prices opened at Rs 19,339/kg and rose to a high of Rs 19,595/Kg during the day's trading.