Gold Rises to Record After Fed Cuts Rates, Sending Dollar Lower

By Pham-Duy Nguyen

Jan. 30 (Bloomberg) -- Gold rose to a record after the Federal Reserve lowered interest rates for the second time in nine days, weakening the dollar and boosting the appeal of the precious metal as an alternative investment.

The Fed cut the federal funds rate by half a percentage point to 3 percent, the lowest since June 2005, after an emergency reduction of 0.75 percentage point on Jan. 22. Fed cuts in 2007 totaled 1 percentage point, sending the dollar 9.5 percent lower against the euro, while gold gained 31 percent in 2007, the most since 1979.

``Gold will continue to rise,'' said Stuart Flerlage, who helps manage more than $600 million at NuWave Investment Corp. in New York. ``U.S. interest-rate cuts continue to underpin the fiat-currency play. Investors will continue to seek safe haven in one of the primary traditional stores of value.''

Gold futures for April delivery rose $7.40, or 0.8 percent, to $933.70 an ounce at 3:36 p.m. in after-hours trading on the Comex division of the New York Mercantile Exchange. Earlier, gold touched $942.20, the highest ever for a most-active contract. Before the Fed announcement, the contract had fallen $4.50 to close at $926.30.

Gold for immediate delivery also rose to a record $936.61 an ounce.

The euro rallied as much as 0.9 percent against the dollar after the announcement. Policy makers said that ``downside risks to growth remain.''

Housing Slump, Mortgage Losses

Before today's rate reduction, gold had gained 28 percent since Sept. 18, when the Fed began cutting borrowing costs because a housing slump and mounting losses in the subprime- mortgage market threatened to push the U.S. economy into a recession. The Fed had held rates steady since June 2006 before the Sept. 18 cut.

Economic growth slowed to an annual rate of 0.6 percent in the fourth quarter, compared with a 4.9 percent pace in the previous three months, the Commerce Department said today. The U.S. House of Representatives yesterday approved a $146 billion economic stimulus plan. Consumer prices last year rose 4.1 percent, the most since 1990.

``Gold is going higher on the liquidity that's being flooded into the market,'' said Frank McGhee, head metals trader at Integrated Brokerage Services LLC in Chicago. ``It's going to continue the stagflation scenario we've had for the past six months.''

Stagflation occurs when costs accelerate while growth slows.