Gold leaps $20 after U.S. Fed cuts interest rates to near zero

The gold price rises above $850 after Fed cuts rates to zero to 0.25 percent while Euro jumps to $1.41 against dollar, boosting bullion and U.S. stocks jump.

NEW YORK (Reuters) - 

Gold rallied above $850 an ounce on Tuesday after the Federal Reserve slashed U.S. interest rates to fight a global economic slowdown, bolstering bullion's appeal as a hedge against inflation.

The U.S. Federal Reserve cut its target for overnight rates to a record low zero to 0.25 percent, and said it would employ "all available tools" to dispel a year-long recession.

"They are going to have to let the economy inflate much longer than they normally would. Longer term, it's going to build an inflationary bubble, and it's going to make the last five years look very paltry," said Frank McGhee, head precious metals trader of Integrated Brokerage Services.

Spot gold was last at $856.60 at 4:00 p.m. EST (2100 GMT), up 2.2 percent from $837.80 an ounce late on Monday in New York.

U.S. February gold rose nearly 3 percent to a two-month high of $860.80 an ounce on the COMEX division of the New York Mercantile Exchange, after settling up $6.20 to $842.70 prior to the Fed announcement.

"Lower interest rates reduce the opportunity cost of holding gold," said Standard Chartered analyst Daniel Smith.

"If you look at bonds as well, yields are low," he added. "That again means the opportunity cost of holding other things is much lower than it was."

Even as fears of deflation prompted the Fed to slash rates, gold retained its allure as an inflation hedge among investors watching central banks flood financial markets with money.

U.S. stocks rallied, with the blue-chip heavy Dow Jones industrial average up nearly 400 points. The dollar tumbled against the euro after the rate cut. The euro rose above $1.41, more than 5 cents above its session trough.

"Whether the Fed cuts by quarter of a point, half a point, or three quarters of a point, it is all heading in the same direction, which is interest rates trending towards zero," said RBS Global Banking & Markets strategist Stephen Briggs.

Gold is often bought as an alternative asset to the dollar and tends to move in the opposite direction to it.

ETF HOLDINGS FIRM

Investors remained interested in gold exchange-traded funds. The world's largest gold ETF, the SPDR Gold Trust said its holdings rose by just over three tonnes on Monday.

Among other precious metals, platinum was at $857.50 an ounce, up 5 percent from its previous finish of $817 in New York late on Monday. Palladium was at $178.00 which was 4.1 percent above Monday's late quote of $171.

Traders are awaiting more news on a mooted U.S. plan to bail out beleaguered carmakers, the main buyers of platinum.

Platinum reached parity with gold for the first time since 1996 on Thursday, and is holding just below the yellow metal.

Spot silver was at $11.11, which was 4.6 percent higher than its Monday close of $10.62.

(Additional reporting by Jan Harvey in London; Editing by David Gregorio)

(c) Reuters 2008. All rights reserved.

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