(Recasts, updates with market activity, closing prices; adds NEW
YORK to dateline, pvs LONDON)
By Frank Tang and Atul Prakash
NEW YORK/LONDON, Jan 22 (Reuters) - Gold bounced back from a
three-week low to trade at $890 an ounce on Tuesday, as a surprise
rate cut by the Federal Reserve and a sliding dollar offset initial
liquidation by commodity funds.
U.S. stocks also 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.
Spot gold <XAU=> surged more than 3 percent to a high of 894.30
an ounce in volatile trading and was at $890.30/891.00 by New York's
last quote at 2:15 p.m. EST (1915 GMT), against $867.10/867.80 in
late European trade on Monday.
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.
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 the U.S. markets were shut for the Martin Luther King 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.
"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.
The Fed's emergency move to cut rates by three quarters of a
percentage point was precipitated by a global equities market rout
and wiped out the dollar's yield advantage over the euro.
A rate cut prompts investors to switch to alternative assets,
including gold. A gloomy economic picture also often helps the
metal, traditionally seen as a safe-haven asset that generally moves
in the opposite direction of the dollar.
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.
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.
MARKET STILL NERVOUS
Investors remained nervous about the global economic outlook.
"Gold was already showing signs of recovery before the Fed's
move, but all the precious metals are now well bid," said Tom
Kendall, metals strategist at Mitsubishi Corporation.
"It is a bit risky to say that we are out of the woods
completely as far as the correction in gold goes, but it certainly
looks that way."
Comments from IMF Managing Director Dominique Strauss-Kahn on
Monday that all developed countries were suffering from the U.S.
slowdown entrenched fears that global growth was hitting a wall.
Adding to the gloom, billionaire investor George Soros said the
world was facing the worst financial crisis since World War II and
the United States was threatened with recession.
Other precious metals also rebounded, with platinum <XPT=>
rising as high as $1,553.50 before falling to $1,549.00/1,554.00 an
ounce. It earlier hit a one-month low of $1,507, against
$1,539.50/1,544.50 in Europe late on Monday.
Silver <XAG=> rose to $16.02/16.07 an ounce from its previous
finish of $15.61/15.66, but palladium was up $3.50 to $366.50/371.50
an ounce.
(Additional reporting by Veronica Brown in London and Chikafumi
Hodo in Tokyo; Editing by Marguerita Choy)
