New York (Reuters)-- U.S. gold futures finished 1 percent higher in choppy trade on Tuesday after heavy initial losses, as a surprise rate cut by the Federal Reserve and a sliding dollar offset initial liquidation by commodity funds. U.S. stocks sharply narrowed their initial losses, which followed a rout in global stocks, extending support to the precious metals market.
Gold should be boosted by inflation worries due to possible further rate cuts, and by investors seeking safety amid volatile equities markets, market-watchers said.
"You have an unmistaken signal that they (the Fed) are giving up on the dollar. With lower interest rates and the dollar going lower, you can see a lot more inflation in the pipeline," said Thomas Winmill of Midas Fund in New York, which has about $250 million of assets under management.
The active gold contract for February delivery at the COMEX division of the New York Mercantile Exchange GCG8 settled up $8.60, or 1 percent, at $890.30 an ounce. It peaked at $895.60.
In the overnight sessions, February futures hit a three-week low of $849.50 as investors exited the precious metals market and opted for cash following the global stock slide which began on Monday when U.S. markets were shut for the Martin Luther King Jr. Day holiday.
"There's a liquidity crisis that is hitting all assets in the short term. Some investors with profits in gold are selling to pay for the losses in their other holdings," said Frank Holmes, chief investment officer of U.S. Global Investors, whose two gold-oriented funds have assets exceeding $1 billion.
The Federal Reserve on Tuesday slashed benchmark interest rates by a hefty three-quarters of a percentage point, the biggest rate cut in more than 23 years, in an emergency bid to boost the U.S. economy some fear is on the verge of recession.
Fed policy makers are scheduled to meet on Jan. 29-30. In the wake of the central bank's bold rate cut on Tuesday, financial markets were expecting the Fed to lower borrowing costs again by at least a quarter of a point.
Inflation Play
"In the longer term, with today's interest rate cut, the fed funds rate is now lower than the inflation rate, so there's a negative real interest rate. That means people turn away from paper assets with declining value and turn toward assets with real value, and that could bode well for gold," Holmes said.
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Meanwhile, George Gero, vice president of RBC Capital Markets Global Futures in New York, said that the upcoming gold option expiration and rollover to the next active contract boosted short covering on Tuesday.
COMEX February options are scheduled to expire on Jan. 28, while the first notice day for Feb futures is Jan. 31.
Analysts said that increased volatility in the world financial markets and a possible recession in the U.S. economy could boost flight-to-quality buying in gold.
The dollar tumbled against major currencies except the yen after the Fed slashed its benchmark overnight lending rate. A lower dollar makes gold, which is denominated in the U.S. currency, cheaper for investors holding other currencies.
"People are concerned about devaluation of the dollar. Gold is playing that alternative currency role," Winmill said.
Total turnover in Chicago Board of Trade electronic 100-oz gold futures was 41,075 lots at 2:52 p.m. EST (1952 GMT).
At 2:15 p.m., spot gold was quoted at $890.30/891.00 an ounce, compared with Friday's New York close of $881.90/882.60. London bullion dealers fixed the afternoon spot reference price at $875.
COMEX March silver SIH8 finished down 11.0 cents at $16.105 an ounce, trading in a more than $1 range from $16.295 to $15.255 -- a two-week low.
Spot silver was at $16.00/16.05 versus $16.14/16.19 late Friday. London silver was fixed at $15.57.
Platinum also finished off its session low. April platinum PLJ8 closed down $6.90 at $1,558.60 an ounce, after hitting a 4-1/2 week low of $1,506.10. Spot platinum was quoted at $1,550/$1,555.
March palladium PAH8 ended down $3.95 or 1.1 percent at $371.10 an ounce and spot palladium fetched $366.50/$371.50
(Reporting by Frank Tang; editing by Jim Marshall) |
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