A bright day for precious metals as dollar plunges

Gold and silver prices rise after dollar plunges

A substantially weak dollar pushed precious metals considerably higher today, Tuesday, 04 November, 2008. Silver prices also rose today.

The weakening dollar and higher global demand for raw materials have led to records this year for commodities including gold earlier this year. 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.

On Tuesday, Comex Gold for December delivery rose $30.5 (4.2%) to close at $757.3 an ounce on the New York Mercantile Exchange. On 17 March, 2008 prices had skyrocketed to a high of $1,034/ounce. But prices have dropped significantly (26.3%) since then. Last week, gold prices ended lower by 1.6%. For the month of October, gold ended lower by 18%. It was the biggest percentage loss for gold since February, 1983.

This year, gold prices have lost 8.5% till date. The dollar index has gained 11% this year. For the third quarter ended September, 2008, gold prices ended lower by 5.1%. It was the first quarterly loss for the yellow metal since the second quarter in FY 2007. Prior to that, the yellow metal ended second quarter with a marginal gain of 0.7%. For first quarter prices gained 10.7%.

On Tuesday, Comex silver futures for December delivery rose by 38 cents (3.9%) to $10.13 an ounce. Last week, silver fell 1.9%. For the month of October, silver slipped by 20%. Till date, silver has lost 31% this year. Silver had ended month and quarter of September 2008 with a loss of 10%. For the second quarter, it had gained a paltry 1.4%. Silver had gained 16% in Q1. The metal also had gained for seven straight years.

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.

In the currency market on Tuesday, the dollar fell sharply against the euro and most other major currencies but gained on the yen as Americans headed to the polls and equity markets surged on a further bounce in risk appetite. The dollar index, a measure of the greenback against a trade-weighted basket of six currencies, was at 84.660, up by 1.9%.

On Tuesday, oil futures for December delivery rallied past $70 per barrel to close at their highest level in two weeks, rebounding after dropping nearly 6% in the previous session . Crude oil for December delivery rose $6.62, or 10.4%, to close at $70.53 a barrel on the New York Mercantile Exchange.

Earlier this year, the weakening dollar and higher global demand for raw materials had led to records this year for commodities including gold. Gold reached a record in March as a U.S. housing slump and credit crisis spurred the Federal Reserve to slash borrowing costs. In the latest move, the Federal Reserve has cuts its target bank lending rate to 1% from 5.25% in September, 2007. The Fed did it in eight steps.

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 December delivery closed higher by Rs 126 (1.08%) at Rs 11,740 per 10 grams. Prices rose to a high of Rs 11,807 per 10 grams and fell to a low of Rs 11,476 per 10 grams during the day’s trading.

At the MCX, silver prices for December delivery closed Rs 165 (0.98%) higher at Rs 16,933/Kg. Prices opened at Rs 16,750/kg and rose to a high of Rs 17,218/Kg during the day’s trading.