Bullion metals manage to shine

Weak dollar makes it a bright day for bullion metals

After dropping for two straight days, bullion metals started shining on Wednesday, 18 March, 2009. The weak dollar was mainly the reason for this. The dollar slumped today after Fed said today that it will buy long term treasuries and this also increased the appeal of precious metals 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.

On Wednesday, Comex Gold for April delivery rose $35.9 (4.1%) to close at $925 an ounce on the New York Mercantile Exchange. In the past two days, gold had shed almost 1.4%. Last week on Tuesday, gold had dropped below $900 for first time in two months. Last week, the yellow metal ended lower by 1.5%. For the month of February, gold ended higher by 7.4%. For January, 2009, gold had gained 3.9%. Year to date, gold prices are higher by 8%.

On 17 March, 2008 prices had skyrocketed to a high of $1,034/ounce. But prices have dropped somewhat (8.9%) since then.

On Wednesday, Comex silver futures for May delivery rose $0.85 (5.5%) to end at $12.595 an ounce. Last week, silver fell 0.8% In February, 2009, silver had rose 4.3% after climbing 14% in January. Year to date, silver has climbed 15.8% this year. For 2008, silver had lost 24%.

At the end of a two-day FOMC meeting in mid-afternoon, the Fed said it was committed to buying $300 billion in longer-term Treasurys to help the struggling American economy recover.

In the currency market on Wednesday, the dollar slumped after Fed's announcement. The dollar index, which weighs the strength of the dollar against a basket of six other currencies, fell by almost 3% soon after Fed announced its plan to buy the long term treasuries.

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 lower by Rs 393 (2.6%) at Rs 14,752 per 10 grams. Prices rose to a high of Rs 15,138 per 10 grams and fell to a low of Rs 14,640 per 10 grams during the day's trading.

At the MCX, silver prices for May delivery closed Rs 1,021 (4.7%) lower at Rs 20,625/Kg. Prices opened at Rs 21,625/kg and fell to a low of Rs 20,435/Kg during the day's trading.