Weak economic reports increase precious metal's appeal as alternate investment

After dropping in the previous two sessions, bullion metal prices went up on Wednesday, 04 February, 2009. Weak economic data increased the appeal of the precious metal as a safe haven against alternatives.

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 Wednesday, Comex Gold for April delivery rose $9.7 (1.1%) to close at $902.2 an ounce on the New York Mercantile Exchange. Price shed almost 3.9% in previous two sessions. Last week, gold prices ended higher by 3.5%. For January, 2009, gold had gained 3.9%. Year to date, gold prices are lower by 2.2%.

On 17 March, 2008 prices had skyrocketed to a high of $1,034/ounce. But prices have dropped significantly (13%) since then.

On Wednesday, Comex silver futures for March delivery rose 17 cents (1.4%) to end at $12.47 an ounce. For 2008, silver had lost 24%.

The ADP employment index reported today that U.S. private sector companies shed a seasonally-adjusted 522,000 jobs in January, 2009.

In a separate report, the Institute for Supply Management reported that U.S nonmanufacturing sectors continued to contract but at a slower pace in January. The ISM's non-manufacturing index rose to 42.9% last month from 40.1% in December. In November, the index reached a record low of 37.4%. Readings below 50% indicate that more firms are contracting than expanding.

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 April delivery closed higher by Rs 65 (0.5%) at Rs 14,054 per 10 grams. Prices rose to a high of Rs 14,170 per 10 grams and fell to a low of Rs 13,962 per 10 grams during the day's trading.

At the MCX, silver prices for March delivery closed Rs 208 (1.06%) higher at Rs 19,740/Kg. Prices opened at Rs 19,595/kg and went to a high of Rs 19,896/Kg during the day's trading.