Bullion falls as dollar rebounds

Gold and silver prices give up earlier gains as dollar rebounds

Gold prices dropped sharply on Friday, 1 February, 2008. Gold and silver prices dropped sharply erasing their strong gains from earlier in the session, as the dollar rebounded. Silver prices also ended considerably lower for the day.

Gold generally moves in the opposite direction of the U.S. currency. Gold, as a dollar-denominated commodity, suffers from dollar strength.

Comex Gold for April delivery fell $14.5 (1.6%) to close at $913.4 an ounce on the New York Mercantile Exchange. Last Wednesday, 30 January, 2008 prices had hit a high of $941 in the after hours trading. On Friday, prices touched a high of $941.8 earlier in the session but then dropped.

This year, prices have gained 9.7% till date. In Janauary, prices gained 11%, the highest monthly gain since April 2006. For the week, gold prices closed lower by $2.7 (0.3%) against previous close of $916.1.

Comex Silver futures for March today fell by 12.5 cents (0.74%) to $16.870 an ounce. Silver has gained 13.3% in 2008. The metal had climbed 16% in FY 2007. The metal also has gained for seven straight years. In January itself, prices climbed 14%.

On 31 January, 2008, the Federal Reserve lowered interest rates 0.5% point to 3% today. This was after the 75 bps rate cut to 3.5% that Fed did last week. The interest rate cuts are to avoid the US economy from plunging into recession.

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. Rising crude increases inflationary pressures and vice versa. On the other hand strong dollar reduces the appeal of the metal as alternate source of investment.

Gold witnessed the greatest annual gain in twenty eight years by gaining $200/ounce (31%) in FY 2007. In 2006, silver had jumped 46% while gold gained 23%.

In the currency markets on Friday, the dollar recovered from weakness tied to an unexpected contraction in the U.S. job market as Wall Street largely shrugged off recessionary fears. The dollar index, which tracks the performance of the greenback against six other major currencies, was at 75.481, up from 75.197.