Gold, oil prices may ease on Fed rate cut

Gold and crude oil prices, which have risen to all-time highs this year, may ease a little if the US central bank Federal Reserve cut rates at its meeting on Tuesday, according to an analyst, who wished not to be named.

The Fed is scheduled to meet on Tuesday to consider revision of interest rates. The US banking sector regulator has already cut the rate at which it lends to banks by 25 basis points to 3.25 per cent at an emergency weekend meeting yesterday.

Fed chief Ben Bernanke was likely to cut interest rates to help stabilise the US financial markets which had been battered by worsening credit problems, analysts said.

"The Federal Reserve's 75 basis point rate cut as against general expectations of 100 basis points would have a negative impact on both gold and oil prices," India Infoline's analyst Tarang Bhanusali said on Tuesday.

Gold spot, trading at $1,007 per ounce, may find support at $998, while crude futures trading at $106.5 may find support at $975, Bhanusali said.

"The slowing of the US economy may also start to slow down the oil market," a Sharekhan analyst said.

Gold April 2008 contract on the Multi Commodity Exchange (MCX) has reacted marginally at Rs 13,120 per 10 grams as against 13,330 yesterday. The crude contract for June also stood lower at Rs 4,244 a barrel as compared with Rs 4,302 a barrel.

"With the Japanese yen hitting a high of 95 and with the euro at 1.5904, the story is absolutely bullish for gold and silver. But at the same time, the risks are also very high. Buying gold at unforeseen prices of $1,026 and silver at $21.20 an ounce can well be a dangerous thing to do," Sharekhan bullion analysts said.

Sharekhan said in its research report that the Fed may continue to throw up surprises on the markets at every available opportunity and so the best strategy is to wait and watch.

The gold and fuel oil futures surge over the last few sessions was triggered by expectation of interest rate cut by the US Fed on Tuesday.

"We expect the interest rate cut will be larger than the previous ones and is likely to further depress the already weak US currency. This has triggered a rush of investor capital into commodities that are traded in US dollars," bullion analyst Amit Zaveri said.

A large chunk of capital in global markets was being channelled into commodities, particularly gold and oil, Zaveri said.

Over the last 50 years or so, gold and oil have generally moved in tandem in terms of price with a positive price correlation of over 80 per cent.

Gold has gone up as much as 19 per cent in 2008, on top of a 32 per cent rise last year, on fears of the inflationary impact of rising energy costs and expectations of further interest rates cuts in the US. Surge in crude oil and rate cuts by the Fed elevate gold's appeal as an alternative investment.