Gold up as Fed keeps low-rate policy, dollar falls

AP News
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Posted: Dec 16, 2009 5:11 PM

Gold prices bounded higher Wednesday as the Federal Reserve reaffirmed its pledge to keep interest rates low for the foreseeable future.

Gold for February delivery rose $13.20 to $1,136.20 an ounce on the New York Mercantile Exchange.

As widely expected, the Fed kept its benchmark interest rate at a level near zero, where it's been all year, in an effort to spur lending and further support the economic recovery.

The ultra-low rates have been a drag on the dollar since March, encouraging investors to sell the greenback and buy assets like stocks and commodities that can earn bigger returns. Gold has been one of the biggest beneficiaries of the drop in the dollar because of its use as a hedge against a weak currency as well as inflation.

Gold had been rallying prior to the central bank's statement on the economy, which came at the conclusion of a two-day policy meeting, as the dollar weakened. Immediately following the statement, the dollar briefly popped and gold prices pared their gains in after-hours trading on the Nymex. But the months-long trend of a weaker dollar and higher gold soon resumed.

Analysts say the Fed's commitment to keeping interest rates low is good for gold over the long-term because it means the dollar should continue to weaken, or at the very least, not strengthen significantly.

"All the trends are intact," said Jeffrey Friedman, senior market strategist at futures brokerage Lind-Waldock.

In recent weeks, the dollar had strengthened and gold fell as investors bet that the improvement in the economy would force the Fed to raise rates sooner than expected. Prior to Wednesday's jump, gold had fallen 8.5 percent from a record high of $1,227.50 an ounce hit earlier this month.

Friedman said the pullback was warranted after such a big jump. Prices are up nearly 30 percent for the year.

"A $100 break in gold, or an 8 percent correction, does not signify the end of a bull market."

Other metals also rose. March silver jumped 23.8 cents to $17.693 an ounce, while January platinum gained $5.10 to $1,457.60 an ounce. Palladium futures rose 2 percent.

March copper futures added 6.4 cents to $3.2055 a pound.

Oil prices soared, recouping a week's worth of losses, after the government said crude supplies fell more than expected last week. Light, sweet crude for January delivery rose $1.97, or 2.8 percent, to $72.66 a barrel.

Prior to Wednesday, oil had fallen 8.5 percent this month as investors worried that prices had risen more than current supply-demand conditions warranted.

In other Nymex trading, gasoline futures rose 2.88 cents to $1.8739 a gallon, while heating oil futures rose 6.25 cents to $1.9658 a gallon.

On the Chicago Board of Trade, March wheat futures inched up half a cent to $5.3725 a bushel, while corn for March delivery added 2.75 cents to $4.1025 a bushel.

March soybeans rose 5 cents to $10.67 a bushel.

Other soft commodities, including cotton, sugar, coffee and cocoa, rose.