Big drop for precious metals

Prices witness big slide as dollar heads up and economic recovery continues

Precious metals ended considerably lower on Tuesday, 04 January 2011 at Comex. Prices fell as the dollar pared initial weakness and headed up and economic data showed that recovery is on track thereby decreasing the appeal of bullions as a an alternative investment.



On Tuesday, gold for February delivery fell by $44.1 (3.1%) ending at $1,378.8 an ounce on the New York Mercantile Exchange. It was biggest one day drop for gold in three weeks time. Last week, gold ended higher by 3%.

Gold ended the month of December, gold ended higher by 2.5%. It ended the fourth quarter, higher by 8%, its ninth consecutive quarterly gain. Before this, it ended the third quarter higher by 5%. For the second quarter, gold ended up by 12%. For the first quarter of this year, gold rose by 1.7%. For the year of 2010, gold ended higher by 30%, its tenth consecutive yearly gain.

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 bullion metals have registered increase in prices despite strong dollar in recent times and vice versa.

Though some of the recent strength in metals can be attributed to weakness in the U.S. dollar, in which the commodities are denominated, but there is also demand, certainly for gold, from investors seeking a hedge against inflation risks and uncertainty in the global financial system.

Gold prices had been doing well since late August on expectations that Federal Reserve efforts at monetary stimulus will depress the dollar, making gold more valuable as an alternative store of wealth.

On Tuesday, December Comex silver futures ended lower by $1.62 cents (5.2%) at $29.51. Prices gained 3.3% last week.

Silver prices gained almost 55% in the fourth quarter of this year. For the third quarter, silver gained nearly 18%. For the second quarter, silver ended higher by 3.1%. For the first quarter of this year, silver rose by 3%. In FY 2010, silver ended higher by 83.7%.

In the currency market on Tuesday, the dollar index, which weighs the strength of the dollar against a basket of six other currencies rose by 0.3%.

The Commerce Department in US reported on Tuesday, 04 January 2011 that U.S. factory orders jumped 0.7% in November to $423.9 billion, well ahead of the forecast for a 0.1% increase. Orders for October were also revised to show improvement. Orders in October fell 0.7% instead of the originally reported 0.9%. Excluding transportation, factory orders rose a sharper 2.4% in November. A steep drop in the sale of aircraft prevented factory orders from rising even higher.

Bullion metal prices are expected to continue with their joyride in the coming months with gold expected to reach between $1,600 and $1,700 an ounce and silver likely to attempt to test highs in the $50 area.

At the MCX, gold prices for February delivery closed lower by Rs 338 (1.6%) at Rs 20,449 per ten grams. Prices rose to a high of Rs 20,798 per 10 grams and fell to a low of Rs 20,423 per 10 grams during the day's trading.

At the MCX, silver prices for March delivery closed Rs 1,518 (3.2%) lower at Rs 45,066/Kg. Prices opened at Rs 46,494/kg and fell to a low of Rs 44,850/Kg during the day's trading.