Gold, Silver Rebound as Dollar Drops on Fed's Discount-Rate Cut
By Stewart Bailey
Aug. 17 (Bloomberg) -- Gold and silver rebounded in New York after the Federal Reserve unexpectedly reduced its discount rate, sending the dollar lower and increasing the investment allure of precious metals.
The Fed said it is prepared to take further action to ``mitigate'' damage from the rout in credit markets. Commodities yesterday plunged the most in at least five decades as crashing equities led investors to sell metals, energy and grains to raise cash. Gold often moves in the opposite direction of the dollar, which fell as much as 0.9 percent versus the euro today.
``The cavalry, led by Bernanke, came to the rescue,'' said Leonard Kaplan, president of Chicago-based Prospector Asset Management. ``You would anticipate this reaction'' following a rate cut, he said. The reduction in borrowing costs was Ben S. Bernanke's first as Fed chairman.
Gold futures for December delivery rose $8.80, or 1.3 percent, to $666.80 an ounce on the Comex division of the New York Mercantile Exchange. Yesterday, the metal fell 3.2 percent, the most since October. Futures have gained 4.5 percent this year.
Silver futures for September delivery rose 30.5 cents, or 2.7 percent, to $11.80 an ounce. The percentage gain was the biggest since Feb. 23. Yesterday, the metal plunged 8.4 percent, the most since Sept. 11. Futures have dropped 8.8 percent this year.
Gold dropped 2.2 percent this week, and silver slumped 8.3 percent, the most since early March.
The dollar snapped a four-day rally against the euro today and declined against 14 of 16 major currencies.
`Everything Liquidated'
Yesterday, ``everything that could be liquidated was sold, including gold,'' said Marty McNeill, a trader at RF Lafferty & Co. in New York. ``Now we'll see how far the bounce goes.''
Gold may extend the rally on signals the Fed wants to halt a credit crisis, rather than curb inflation, said Walter Otstott, a broker at Dallas Commodity Co. in Dallas.
``If you look at the language of the Fed announcement, they've shifted from concern on inflation to the tightening credit issues that would have a serious impact,'' Otstott said. ``That's a good sign for the metal market.''
Gold is often used by investors as a hedge against rising consumer prices. Spot gold climbed to a record $850 an ounce in January 1980 after oil costs doubled in a year, sparking a surge in the inflation rate.
The Fed cut the so-called discount rate by 0.5 percentage point to 5.75 percent.
To contact the reporter on this story: Stewart Bailey in New York at sbailey7@bloomberg.net .
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