Gold edges down on firm dollar

Filed on June 15, 2008

LONDON - Gold weakened a touch yesterday as the dollar remained firm against the euro and oil prices dropped by $3 a barrel.

Investors are now awaiting the outcome of this weekend’s meeting of G8 finance ministers.

Any further comment on inflation at the meet may fuel expectations for a US rate hike, which could strengthen the dollar, pressuring gold. The precious metal tends to move in the opposite direction to the dollar, as it is often bought as a hedge against weakness in the U.S. currency.

Gold dipped to $864.30/864.95 an ounce at 1506GMT, from $867.55/869.55 late in New York on Thursday.

Gold prices have suffered as the dollar heads for its strongest week in three years on the back of rising speculation of a rate hike, shedding just over four per cent since Monday.

“With the stronger US dollar environment, gold has been under a lot of pressure,” said Dan Smith, an analyst at Standard Chartered.

“Investors are obviously still interested in gold for inflation hedging purposes and safe haven purposes,” said Smith.

Meanwhile, spot platinum rose to $2,028.00/2,043.00 an ounce from $2,010.50/2,030.50 late in New York.

Moreover, silver was steady at $16.45/16.50 an ounce against $16.44/16.54, while spot palladium rose to $448.50/456.50 an ounce against $433.50/441.50. - Reuters

Indian inflation races to its highest in 7 years

NEW DELHI - Indian inflation raced to its highest in seven years at the end of May and could top 10 per cent this month as higher fuel prices feed in, stoking speculation of more central bank tightening after this week’s rate hike.

The Reserve Bank of India on Wednesday unexpectedly raised its key lending rate by 25 basis points to 8.0 per cent to contain inflation expectations, but left all other rates unchanged.

It was the first hike in the repo rate in more than a year, but with the impact of costlier petrol and diesel yet to be felt, analysts said more could be around the corner.

“The number is a surprise given the fuel price hike is yet to be factored in. We see headline inflation crossing 10 per cent next week and remaining around 9.5 per cent in June and July,” said A. Prasanna, economist at ICICI Securities in Mumbai.

“With this kind of inflation behaviour, we do not rule out further policy action in the July review.”

Wholesale price inflation, India’s most widely watched measure, rose 8.75 per cent in the 12 months to May 31, well above expectations, data released yesterday showed.

That was a substantial jump from the previous week’s annual rise of 8.24 per cent and a forecast of 8.28 per cent in a Reuters poll of economists.

The inflation rate is now at its highest since February 10, 2001, when it was 8.77 per cent. Continuing a trend of sharp upward revisions, inflation for the week ended April 5 was revised up to 7.71 per cent from a provisional 7.14 per cent.

A Reuters poll carried out last week on the day fuel prices were raised showed economists expected the increases to lift inflation to a 13-year high of 9.2 per cent in the 12 months to June 7, but forecasts are now being revised.

“With the fuel price pass-through we are staring at double-digit inflation. This is crazy,” said D.K. Joshi, principal economist at domestic ratings agency Crisil in Mumbai.

Fuelling price pressures: Last Wednesday, the communist-backed ruling coalition, which faces state and general elections within the next 12 months, ended 10 days of debate over the political consequences and raised state-set petrol and diesel prices by about 10 per cent.

The rise was bigger than expected as India joined a growing number of other Asian countries no longer able to afford big subsidies in the face of rising prices.

Energy costs account for 14.2 per cent of the inflation index, and the price increases to key fuel inputs will have a cascading impact on overall prices in the economy.

India’s industrial output rebounded in April from its slowest annual growth in six years, showing resilience which analysts said gave the central bank room to follow up on its decision to raise the key lending rate earlier this week.

“We may see more interest rate hikes given the rising inflation and the strong industrial production data,” Crisil’s Joshi said.

In three steps in April and May, the RBI raised the cash reserve ratio (CRR), the amount of funds banks have to keep on deposit with it, by 75 basis points to 8.25 per cent, its highest level in seven years, to control cash in the system.

Economists said the CRR could be raised further in tandem with rate increases.

“Given the RBI’s concern about anchoring inflation expectations, we expect another 25 basis point hike in repo rates during the third quarter of 2008 and another 100 basis points worth of cash reserve ratio hikes during this financial year,” said Sonal Varma of Lehman Brothers in Mumbai.

The benchmark 10-year bond yield held steady at 8.37 per cent from immediately before Friday’s data. But a few minutes earlier market talk of a spike in inflation had pushed it up to 8.39 per cent, a level also touched on Thursday when it was a one-year high.

The partially convertible rupee was flat at 42.865/875 per dollar from before the data.

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