PRECIOUS METALS: NY Gold Climbs On Volatile Day After Fed Cut

PRECIOUS METALS: NY Gold Climbs On Volatile Day After Fed Cut

By Allen Sykora 
Of DOW JONES NEWSWIRES

Gold and other precious metals went on a wild roller-coaster ride Tuesday, first screaming down a steep slope as global equities tumbled, before suddenly veering back uphill when stocks rebounded and the U.S. dollar plummeted after a surprise Federal Reserve rate cut.

But while bargain hunting set in to a gold market where much of the sentiment has been bullish lately, some observers nevertheless offered caution about the upside, in case equity-market weakness should resume.

February gold rose $8.60 to $890.30 an ounce on the Comex division of the New York Mercantile Exchange. As pit trade was closing, the February contract at the Chicago Board of Trade was up $9.40 to $890.80. Both snapped back more than $40 from matching overnight lows of $849.50.

March silver fell 11 cents to $16.105 but was well up from an overnight low of $15.255. As it was closing, CBOT March silver was down 9.6 cents to $16.127 but up from a low of $15.26.

"A 75-basis-point cut by the Fed and the dollar down the way it is drove the gold and silver back up," said Frank Lesh, broker and futures analyst with Future Path Trading. "There was indeed some short covering involved, and some bargain buying in there."

The Federal Reserve announced a 75-basis-point rate cut in the federal-funds and discount rates. That helped reverse the tide of earlier selling of the metals that was described as liquidation to raise cash, much of it by funds, due to a sharp tumble in global stocks Monday when the U.S. was closed for Martin Luther King Jr. Day, and sharp overnight weakness in U.S. stock-index futures.

"Gold prices received an early booster shot in the arm on the heels of the Fed's decision to prevent a complete meltdown in the Dow by slashing interest rates more than one week ahead of their expected date," said Jon Nadler, analyst with Kitco Bullion Dealers. Overnight losses "turned into a day of gains as the largest U.S. central bank accommodation in over 20 years fueled a return to long oil and gold positions and a logical selling wave in the U.S. dollar."

As gold closed, the dollar index was down 0.448 point to 76.378. Investors often buy gold and other precious metals as a hedge against dollar weakness.

When stocks bounced from their lows, there was less need by funds to liquidate metals positions, said George Gero, vice president with RBC Capital Markets Global Futures. The March S&P 500 futures were down by around 14.60 points as gold closed, but this was well up from an overnight loss that hit 70 points.

Furthermore, the Federal Reserve move boosted precious metals on ideas that aggressive easing may add to inflation, said a trader. "You saw a flight to the metals as a hedge against inflation brought on by such a drastic rate cut," said a trader.

Technically, February gold bounced from a key chart-support level around $850, and March silver from support around $15.25, Lesh said.

Zachary Oxman, senior trader with Wisdom Financial, said heavy bargain hunting helped lift gold from its early setback when "a lot of people realized the market was dipping too much."

Gold's fundamentals had not necessarily turned for the worse, since the selling was largely funds looking to raise cash as stocks fell, he said. "It just had to do with the fact that traders needed to liquidate some positions, so the liquidation came from the commodities side."

Nevertheless, Oxman and Nadler offered some caution about chasing the rally, since stocks may weaken again and prompt more liquidation of metals.

"Whether stability or confidence has now returned to these markets remains anyone's guess. Probably not," Nadler said. "We have seen previous instances where an action or an announcement is digested and then investors resume the course they were already on."

The potential for more stock-market selloffs is a reason to be careful about accumulating gold for now, Oxman said.

"I think you're probably going to see that a couple of more times before the market picks a bottom," he said. "I look for continued volatility. But after the market settles down, I think you'll see people accumulate back into gold.

"I'd use any dips to lightly accumulate. I'd watch that $850 because that seems like a big support level. If we break that $850, I'd look at setting some pretty tight (protective) stops," he said.

Otherwise, looking ahead, Oxman looks for the Fed rate cut to support gold, especially since more easing is anticipated.

"It's going to slam the dollar," he said. "And when you get a Fed cut, that will lead to more inflation."

Gold did post a bullish technical reversal on the charts, with the February futures first falling below Friday's low of $870.60 but then settling above Friday's high of 881.70.

Meanwhile, April platinum fell $6.90 to $1,558.60 but rose from an overnight low of $1,506.10. March palladium declined $3.95 to $371.10 but bounced from an overnight low of $360.70.

These metals followed gold higher in response to inflation fears and moves in other markets following the Fed action, said a desk trader. Additionally, platinum drew bargain hunting from market participants wanting to accumulate metal in a market with especially tight supply and demand fundamentals, he added.

"The fact is there is still a supply deficit and very high demand, especially ahead of the Chinese New Year, with jewelry demand expected to increase," he said. "So you saw a lot of people bargain hunting and locking in metal."

Settlements (includes open-outcry and electronic trading): 
London PM Gold Fix: $875 versus $871.25 on Monday and $882 Friday 
Spot gold at 1:31 p.m. ET: $890.10, up $25.20 from Monday; Range: $849.65-$894.50 
February gold (GCG08) $890.30, up $8.60; Range $849.50-$895.60 
March silver (SIH08) $16.105, down 11 cents; Range $15.255-$16.295 
April platinum (PLJ08) $1,558.60, down $6.90; Range $1,506.10-$1,567.90 
March palladium (PAH08) $371.10, down $3.95; Range $360.70-$373.90

-By Allen Sykora, Dow Jones Newswires; 541-318-8765; allen.sykora@dowjones.com

(END) Dow Jones Newswires

January 22, 2008 14:51 ET (19:51 GMT)

Copyright 2008 Dow Jones & Company, Inc.