Gold rallies after Fed cuts rates

Gold prices rallied on Tuesday after the US Federal Reserve cut interest rates in an emergency meeting in an effort to prop up the weakening US economy.

Spot gold in London surged to $874.65 a troy ounce as the US dollar weakened against the dollar after the Fed cut interests rates by 75 basis points to 3.5 per cent and warned it was ready to take further action.

Before the central bank action, gold prices had tumbled to a three-week low of $849.50 an ounce as traders took profits from the precious metal's recent rally to cover losses elsewhere. Gold hit in early January an all-time record of $914.0 an ounce.

Other commodities prices pared losses or move to positive territory after earlier heavy losses triggered by fears that the US economic slowdown could spread to emerging countries such as China and India, the main engine of fresh demand.

Sales of commodities, particularly of agricultural raw materials, to raise funds to offset losses in others markets also contributed to the price fall in early morning, traders said. Commodities prices registered strong gains last year and in early 2008.

Robert Laughlin of MF Global in London said that the immediate risk for commodities was "a liquidation of open positions by some market participants in order to finance positions on other markets."

After the Federal Reserve interest rate cut, crude oil prices pared losses with ICE March Brent down $1.14 to $86.37 a barrel. Previously, Brent fell to a low of $85.00 a barrel.

Nymex February West Texas Intermediate fell to $87.67 a barrel, a drop of $2.90 from Friday's close, but about $1.02 cents below Monday's last electronic quotes.

The Nymex exchange did not set a settlement price on Monday as the open-outcry trading floor was shut for a public holiday. But electronic trading late Monday had WTI at $88.69 a barrel, meaning the Tuesday loss was of about $1.02 a barrel.

WTI fell in earlier trading and before the central bank's action to a six-week low of $86.11 a barrel.

On the London Metal Exchange, copper pared losses to fell 0.2 per cent to $6,870 a tonne and aluminium moved 0.4 per cent higher to $2,420 a tonne.

Before the Fed interest cut, Peter Fertig, of Dresdner Kleinwor in Frankfurt, said: "Fears of a US recession dragging also the rest of the world into an economic slump had a negative impact on base metals."

Although analysts said that copper, the base metals' bellwether, is the most exposed to a US recession and any spill over to emerging markets, they also point that the red metal's inventories have fallen recently and demand in China remains healthy.

In addition, Zambia, the world's tenth largest copper producer, on Tuesday said it was rationing power supply to the mines as the country faces shortages, which could reduced copper supply in the next few weeks.

In spite of the Fed announcement, agricultural commodities fell sharply after strong gains last year and early 2008. In Chicago, CBOT March corn fell 19 cents to $4.79 ¼ a bushel and CBOT March wheat loss 23 ½ cents to $9.39 a bushel. CBOT March soyabean loss 39 cents to $12.25 a bushel.