Rises to Highest Since 1980 as Dollar Slumps on Fed's Cut
By Pham-Duy Nguyen
18 (Bloomberg) -- Gold futures rose to a 27-year high after
the Federal Reserve cut interest rates, sending the dollar
to a record low against the euro and boosting the appeal of
the precious metal as a currency hedge.
The Fed lowered its benchmark rate by 0.5
percentage point, more than economists forecast, to 4.75 percent,
the first cut in four years. Five of the past six bear markets
for the U.S. currency have sparked a rally in gold.
``Investors are scared,'' said Ron Goodis,
futures trading director at Equidex Brokerage Group Inc. in
Closter, New Jersey. ``The rate cut is inflationary, and money
is flowing into gold as a hedge.''
Gold futures for December delivery jumped
$11.70, or 1.6 percent, to $735.50 an ounce at 3:26 p.m. in
electronic trading on the Comex division of the New York Mercantile
Exchange. That marked the highest price for the most-active
contract since Feb. 11, 1980.
``Today's action is intended to help forestall
some of the adverse effects on the broader economy that might
otherwise arise from the disruptions in financial markets,''
the Federal Open Market Committee said in a statement after
meeting today in Washington.
The reduction in borrowing costs was the
first since 2003. Before today's meeting, the Fed kept rates
unchanged since June 2006.
``This is the most aggressive move they could
have made,'' said William O'Neill, a partner at Logic Advisors
in Upper Saddle River, New Jersey. ``It's bullish for gold.''
A cut of 50 basis points or more would weaken
the dollar further and spark a rally in gold, analysts said
before the rate cut was announced.
Gold futures were down 10 cents to $723.70
an ounce at the close of floor trading.
Gold may rally in all currencies as other
central banks follow the Fed and reduce rates to ease credit-market
turmoil, analysts said. The sudden disappearance of bid or
offer prices for securities that are collateralized by some
defaulted U.S. subprime mortgages have roiled global equities
and debt securities.
``Central banks are certainly on the same
wavelength,'' O'Neill said. ``Gold has been anticipating falling
global interest rates.''
Gold priced in euros, yen and the British
pound have rallied in the past month.
``This is a global bull market in gold,''
Dennis Gartman, economist and editor of the Suffolk, Virginia-based
Gartman Letter, said in a report before the Fed announcement.
``Weakness is to be bought rather strength being sold.''
The euro reached a record $1.3981 after the
announcement. Gold futures climbed to $873 an ounce, the highest
ever, in January 1980.