Bullion metals turn pale

Prices register big drop as China hints at tightening policy

Precious metal prices fell on Tuesday, 12 January 2010. Prices slipped on demand concerns as China signaled a bias to tighten monetary conditions recently thereby hinting lesser demand for metals and commodities in coming months.

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 Tuesday, gold for February delivery ended at $1,129.4 an ounce, lower by $22 (1.9%) an ounce on the New York Mercantile Exchange. Last week, it had ended higher 3.9%. Year to date in FY 2010, gold has risen by almost 3.1%.

Last year, after hitting a low at $807.30 per ounce on 15 January 2009, gold futures rallied almost 51% to hit an all-time high at $1217.40 per ounce during early December of 2009 but fell from those levels at the end.

On Tuesday, March Comex silver futures ended lower by 44 cents (2.4%) at $18.255 an ounce. Last week, silver ended higher by 9.6%. Year to date in FY 2010, silver has risen by almost 8.4%.

Silver futures had hit a low at $10.42 on 15 January 2009 and hit a high at $19.30 per ounce on 2 December 2009. Like gold, silver also ended lower than its all time high level.

In the currency market on Tuesday, the dollar index, which weighs the strength of dollar against the basket of six other currencies fell by almost 0.2%. Earlier in the day, it rose by almost 0.4%.

In a recent move, China's central bank on Tuesday sold one-year bills at a higher yield for the first time since August 2009, fanning concern the government is moving to tighten liquidity. The People's Bank of China on Tuesday lifted the reserve requirements for banks by a half point and lifted its interbank rate for the second time in a week. It also raised the auction yield on one-year bills by a bigger-than-expected 8.29 basis points and drained a record 200 billion yuan ($29 billion) from the market, signaling a bias to tighten monetary conditions.

Earlier during the week, Chinese government report showed that exports climbed for the first time in 14 months and imports reached record highs. China's imports surged 55.9% in December, while exports rose 17.7% from the same period a year ago. In addition, China's Finance Minister pledged to spend the full amount of planned stimulus in 2010, despite improvements in its economy and efforts to control bank lending.

Gold had ended FY 2009 higher by 24%. Silver futures had ended 2009 up 50%. The dollar index had lost 4.2% against its counterparts last year.

At the MCX, gold prices for February delivery closed lower by Rs 153 (0.89%) at Rs 16,878 per ten grams. Prices rose to a high of Rs 17,084 per 10 grams and fell to a low of Rs 16,730 per 10 grams during the day's trading.

At the MCX, silver prices for March delivery closed Rs 441 (1.55%) lower at Rs 27,993/Kg. Prices opened at Rs 28,380/kg and fell to a low of Rs 27,869/Kg during the day's trading.