Gold making 10 week Highs on Dollar weakness - Rupee Stronger
At 9:50 a.m., the rupee was at 40.315/325 per dollar, inching up from Thursday's 40.3525/3625, and just short of a 40.28, its strongest since May 1998.
"The flows are strong this morning, but the question on everyone's mind is whether the RBI will continue to defend 40.28," said a dealer with a private bank, referring to the Reserve Bank of India.
The central bank is widely suspected of playing an active role in the currency market recently, buying dollars through state-run banks to stem the local unit's rise.
Robust investments by foreigners in India, and massive debt raised overseas by local companies, have bolstered the rupee, helping it gain more than 9.5 percent against the dollar this year, to be Asia's best performing currency in 2007.
Foreign funds have bought more than $9.3 billion of equities so far in 2007, including $3.6 billion so far this month, compared with about 8 billion they bought all of last year.
In early trade, the benchmark 30-share BSE index climbed to a record -- its 12th in 15 sessions.
A member of the central bank's panel on capital account convertibility said on Thursday that the currency's strong surge would hurt growth.
"Alarm bells are already ringing due to the sharp appreciation of the rupee and this will affect growth," Surjit Bhalla, principal at Oxus Research and Investments said.
Rupee / US Dollar Forex Currency News, Gold in India, and The Sensex index on the Bombay Stock Exchange (BSE). Euro / Rupee and Yen / Rupee.
While dollar investors have suffered the pain of watching the currency slide, their counterparts in commodities have reaped the benefits that a lower greenback can bring.
The prices of all sorts of commodities from crude oil to copper wire have risen sharply over the past year, and analysts say that buoyancy has come in part at the expense of the sinking dollar.
The story goes like this: Most commodities are priced in U.S. dollars. As the dollar depreciates, it takes more dollars to price a commodity at what the market believes it's worth. A weak dollar also makes commodities more attractive to foreign investors, who find they can buy more of a product for less.
To be sure, surging commodity prices have root causes beyond a weak dollar. Markets cramped by tight supplies and swelling demand -- particularly from developing nations such as China -- have seen sharp price increases in recent years. At the same time, the speculative money following those trends has ballooned, pushing prices even higher.
Those factors helped drive nickel prices to more than $40,000 in February from less than $15,000 per metric ton at the start of 2006. Zinc prices more than doubled last year. Recently, lead and tin have been tallying fresh records almost daily.
But those gains also coincided with the dollar's steep descent.
"Most of these markets have been so volcanic this year, and this (the falling dollar) is what I would call an 'and' factor," said Barclays Capital managing director Paul Horsnell. "It's one factor supporting demand a bit."
The amount of speculative money in the commodities markets also has its link to dollar weakness, if somewhat indirect. Low interest rates in this country have contributed to an increase in so-called cheap money, which has given hedge funds the ability to borrow large sums to go after higher-risk, speculative assets such as commodities, said Jon Nadler, an analyst with Kitco Bullion Dealers.
That's left many commodity markets with the mark of "Godzilla-size footprints of the funds stampeding in and out of what they expect to be the next big play," Nadler said.
Interest rates underpin currencies. Historically low interest rates in the U.S. have over the past year contrasted with rising interest rates in Europe -- and the currencies have mirrored that divergence.
The euro, marching higher since the start of last year, bought an all-time record $1.3843 on Friday. Some analysts expect the euro to hit $1.40 before the end of the quarter.
As it relates to commodities, consumers often feel the pain first on the highway and in the home, say analysts.
A $75 barrel of oil and a $3 gallon of gas have a certain amount of dollar depreciation priced into them, according to Axel Merk, president of Merk Hard Currency Fund. The same goes for copper and nickel and zinc, the metals used to coat steel. Consumers feel that price inflation in the costs of home improvement and construction.
"The price at the pump goes up as the dollar goes down," Merk said. "It's the one area where you see the pricing follow through fairly rapidly."
The dollar hasn't just fallen against stout currencies such as the euro and British pound. John Lonski, chief economist of Moody's Investor Service, points out that the dollar has lost ground against the currencies of emerging markets, as well. In a year, the dollar has tumbled 15 percent against the Brazilian real, dropped 13 percent against the Indian rupee and fallen 5 percent compared with the Chinese yuan.
That increases the attractiveness of commodities to funds priced in other currencies and helps to explain the run-up in commodity prices, Lonski said.
Gold rallied to a 10-week high on Friday, capping a week with solid gains, fueled by renewed fund buying, a weakening dollar and as investors sharply increased holdings of bullion held by gold exchange-traded funds (ETF).
Analysts said that gold was poised to retest the psychological $700 level in the near term because of a combination of bullish factors including firm energy prices and improving jewelry demand.
Other precious metals also advanced, with platinum hitting a two-month high, silver rising to its highest level in six weeks and palladium increasing to a two-week high.
Gold rose as high as $686.00 an ounce, the highest since May 9, and was quoted at $682.50/683.30 by 3:09 p.m. EDT (1909 GMT), compared with $677.30/678.10 late in New York on Thursday.
Zachary Oxman, senior trader at Wisdom Financial in Newport Beach, California, said that gold's fundamentals were improving, citing renewed inflows by funds and a strengthening Indian rupee, which boosts jewelry demand from the top gold consumer, India.
"In the intermediate term, it looks like the market is a little overbought, but today's rally pushes through that argument and put it more to a long-term trend towards $700," Oxman said.
Gold has attempted several times to break above the $700 level, and retest the 26-year peak at $730 set in May 2006, but so far has failed this year.The dollar extended losses across the board as both U.S. Treasury yields and equity markets fell on ongoing worries in the U.S. subprime mortgage sector.
Further weakness in the dollar might lift gold to new highs, but a recovery in the currency might prompt profit-taking and push the metal down toward $640 an ounce, dealers said.
"I am cautious as recent gains have been made purely on a dollar weakness. The price movement is not artificial, but too much dependence on one factor is not healthy," said Matthew Turner, precious metals analyst at Virtual Metals.
"Gold will be driven by the dollar, but if the currency doesn't move, then it might come back on profit taking."
RALLY BOOSTS ETF HOLDINGS
U.S. gold futures have rallied more than $35, or nearly 6 percent, since it closed at $650.60 on July 5.
Most recent data showed bullion held by StreetTRACKSChanges in gold and silver ETF holdings are closely watched by market participants because sharp inflows in gold ETFs could be a bullish signal as it shows longer-term retail investors are entering the market.
In other precious metals, platinum has been supported by wage negotiations in South Africa, the world's largest producer.
The world's biggest platinum producer, Angloplat , will hold further wage talks with South Africa's biggest mining union next week after it did not file a dispute as expected, the company said on Friday.
The development could lead to a wage deal and avert a possible strike in South Africa, the world's biggest source of platinum group metals.
Meanwhile, U.S.-based Stillwater Mining, the largest producer of platinum metals outside of Russia and South Africa, said it might miss its production goal due to weaker production and the recent labor stoppage at a mine and some processing facilities.
"The price action in platinum is unrelenting and ... the market will likely continue to push higher while there is significant uncertainty around the South African mining situation," J.P. Morgan Securities said in a daily note.
Platinum hit a high of $1,333 an ounce and was last quoted at $1,330/1,334 an ounce, versus $1,320/1,325 late in New York Thursday, while silver was at $13.27/13.32 an ounce after rising to $13.40, against its previous close of $13.24/13.29 late in the U.S. market. Palladium rose $1 to a two-week high of $370/374.
Labels: bullion, currency, dollar, economic. forex, gold, india, indian rupee, sensex, silver, stockmarket, wit
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