A strong finish for precious metals

Gold prices end 3% higher for the week

Precious metals ended higher on Friday, 23 May, 2008 and posted good gains for the week after crude oil prices remained strong and the dollar weakened. Ealier this week, crude oil's rally to a fresh record high above $133 a barrel boosted the precious metal's appeal as an inflation hedge. Oil has doubled in the past year, fueling concern inflation will accelerate.

Gold has traditionally been used as a safe-haven asset against rising inflation. Investor sentiments are boosted by the fact that gold and silver are alternate sources of good investment in the face of declining dollar and rising energy prices. 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. On the other hand, a lower dollar pushes up precious metal prices as their demand lessens as it becomes cheaper for traders holding other currencies.

Comex Gold for June delivery rose $7.5 (0.8%) to close at $925.8 ounce on the New York Mercantile Exchange. For the week, gold prices ended higher by $25 (3%). On 17 March, 2008 prices had skyrocketed to a high of $1,034/ounce.

This year, gold prices have gained 10.4% for the till date against a 7.8% drop for the dollar against the euro. For April, prices closed lower by 6.3%. For first quarter prices gained 10.7%. In January, prices gained 11%, the highest monthly gain since April 2006. For February, it gained 6%. But in March, prices succumbed and fell by 5.5%.

Comex Silver futures for July delivery gained 26 cents (1.5%) to $18.29 an ounce. Silver has gained 22.2% in 2008 till date. For April, it closed lower by 5.5%. Silver gained 16% in Q1. In January this year itself, prices climbed 14%. In February, it gained another 15%. For March, it ended lower by 13%. The metal had climbed 16% in FY 2007. The metal also has gained for seven straight years.

At the currency markets on Friday, the dollar slipped modestly against its major counterparts on the heels of strength in oil prices, but the greenback remained in relatively narrow ranges in quiet trading ahead of Monday's U.S. and U.K. holidays. The dollar index, which measures the U.S. unit against a basket of six major currencies, was at 71.976, down from 72.147.

Since last September, Fed has axed interest rates seven times and brought it down to 2%. The ECB has kept rates unchanged at 4% since June, 2007.

Dollar weakness typically benefits dollar-denominated commodities, such as gold and crude oil, because it makes them cheaper for holders of other currencies. On the other hand strong dollar reduces the appeal of the metal as alternate source of investment.

Among major economic news of the day, resales of U.S. houses and condos dropped 1% to a seasonally adjusted annualized rate of 4.89 million from 4.94 million in March.

In the crude market on Friday, crude for July delivery closed up $1.38 at $132.19 a barrel to gain almost 5% for the week as concerns about the upcoming Atlantic hurricane season sent June prices for natural gas closer to $12 per million British thermal units.

Earlier during the week, crude oil rose after billionaire hedge-fund manager Boone Pickens said prices will reach $150 a barrel this year as demand outpaces supply. Last week, crude-oil futures rallied to a fresh record high near $128 a barrel as Goldman Sachs raised its second-half-of-the-year forecast for oil prices by 32% to $141.