Gold recovers Rs 315 on US Fed rate cut

Gold reacted sharply to the recovery in the global markets after the surprise 75 basis point cut in interest rate by the US Federal Reserve late yesterday.

In Mumbai, standard gold (99.995 purity) and pure gold (99.999 purity) gained a healthy Rs 315 each to close at Rs 11,370 and Rs 11,420 per 10 grams, respectively.

In London, the metal perked up to $888 early on Wednesday from yesterday's low of $849 an ounce.

During the biggest two-day loss on the bourses this week, gold lost Rs 200 per 10 grams in Mumbai.

The precious metal slipped below the benchmark Rs 11,000 per 10 grams yesterday, the lowest since January 7, due to nervousness among traders who ended with huge losses in the equity market volatility.

But the sentiment changed overnight, as sellers kept profit booking plans on hold and even started booking afresh.

"Fundamentals remain strong as geopolitical tensions have rebounded with the Palestinians blowing up the Gaza wall, coupled with crude and base metals offering limited returns. Gold remains the only safe haven for wholesale and retail investors in the present volatility," said Jayant Manglik, commodities head at Religare Enterprises.

Si Kannan, analyst with Kotak Commodities Services, believes the recent decline in prices was a short-term correction which was due since long.

"Going by fundamentals, where a combined effect of continued investor appetite, a weak dollar, record oil prices and their inflationary consequences, and the US sub-prime crisis, gold may average $840 this year, amid price fluctuations between $950 and $675," Kannan said.

The Federal Reserve unexpectedly slashed a key interest rate by a bold three-quarters of a percentage point to 3.5 per cent, the first emergency cut since September 11, responding to a crisis in global stock markets that heightened concerns about a US recession.

Gold moves in line with oil prices and acts as a hedge against inflation.

Gold is likely to see further inflows as traders seek assets offering both safe-haven qualities and strong returns, according to an analyst with a Mumbai-based firm.

In contrast, gold for delivery in February and April declined about half a per cent each to close at Rs 11,273 per 10 grams and Rs 11,348 per 10 grams, respectively on the Multi Commodity Exchange.