Gold Climbs to Nine-Week High as Dollar Slumps on Fed Rate Cut

Dec. 17 (Bloomberg) -- Gold prices rose to the highest in nine weeks as the dollar tumbled after the Federal Reserve cut U.S. borrowing costs, boosting the appeal of the precious metal as an alternative investment. Silver jumped more than 6 percent.

The dollar fell for a sixth straight session, dropping as much as 2.7 percent against a weighted basket of six major currencies. Yesterday, the Fed cut its benchmark rate to a target range of zero to 0.25 percent from 1 percent. Gold, which generally moves in the opposite direction of the dollar, is headed for an eighth straight annual gain.

“These actions by the Fed are the exact thing that got us in trouble in the first place,” said Leonard Kaplan, president of Prospector Asset Management in Evanston, Illinois. “The dollar is doomed, and gold can go to $1,200.”

Gold futures for February delivery rose $25.80, or 3.1 percent, to $868.50 an ounce on the Comex division of the New York Mercantile Exchange. Earlier, the price reached $883.60, the highest since Oct. 10. The metal soared to a record $1,033.90 on March 17.

Silver futures for March delivery climbed 71.5 cents, or 6.7 percent, to $11.42 an ounce, the biggest increase since Nov. 24.

Gold has climbed 3.6 percent this year, while silver is down 23 percent.

The Fed began slashing rates from 5.25 percent in September 2007 as the economy headed into a recession. Policy makers said yesterday that the central bank will use “all available tools” to stimulate growth.

The Fed reduced the federal-funds rate from 6.5 percent in December 2000 to 1 percent by June 2003, where it stayed before rising again a year later. Yesterday’s reduction brought the rate to the lowest ever.

‘Financial Mess’

“We got into this financial mess because of easy credit and leveraged money, and now the Fed wants to encourage the same thing,” Kaplan said.

Since the second quarter of 2007, banks worldwide have posted more than $1 trillion in writedowns and credit losses related to investments in subprime mortgages.

“It’s hard to figure out a bear case for precious metals,” said Chip Hanlon, the president of Delta Global Advisors Inc. in Huntington Beach, California.

The U.S. government has made commitments of more than $8.5 trillion to help ease the credit crisis and pull the country out of a recession that began a year ago.

Gold also may benefit as a hedge against accelerating prices, analysts said.

“When inflation starts to rear its head again following very loose monetary policy, investors will have to park their money elsewhere to preserve their capital,” said Gijsbert Groenewegen, a fund manager at Gold Arrow Capital Management in New York.

Declining Consumer Prices

Consumer costs dropped 1.7 percent in November, the steepest decline on record, the U.S. Labor Department said yesterday. Last year, gold rallied 31 percent as the inflation rate rose the most in two decades.

Still, some investors are hesitant to buy gold as the economy suffers what may be the worst recession since World War II and prices of all assets decline. The Reuters/Jefferies CRB Index of 19 raw materials is down 37 percent this year and the Standard & Poor’s 500 Index of equities has fallen 38 percent.

“Deflationary forces remain intact,” said Dennis Gartman, an economist and the editor of the Gartman Letter in Suffolk, Virginia. He told clients to remain neutral on gold.