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Gold Rises to Highest Since 1980 as Dollar Slumps on Fed's Cut
By Pham-Duy Nguyen
Sept. 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.
`Most Aggressive'
``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.
