Gold fell on Tuesday on profit taking after the metal rallied to a 16-month high the previous day, but sentiment stayed bullish ahead of a widely expected interest rate cut by the US Federal Reserve. Spot gold dropped to $715.30/716.00 an ounce from $716.80/717.60 late in New York.
Gold rallied to its best level since mid-May 2006 at $719.65 on Monday on safe-haven buying sparked by expectations of interest rate cuts. The Fed is expected to slash its benchmark 5.25 percent fed funds rate by at least 25 basis points on Tuesday to help cushion the US economy from credit market turmoil and a housing market slowdown. Lower interest rates tend to make the dollar less attractive and oftenest gold's appeal as an alternative investment.
"If the Fed did cut rates and its statements sort of implied that there could be further rate cuts, then I think that would be positive for the gold price," said David Moore, a commodity strategist at the Commonwealth Bank of Australia.
"$720 would certainly be a realistic possibility in that scenario. If the Fed would cut rates by 50 basis points, again hypothetically speaking, I think that would also be quite positive for the gold price," he said.
The Fed last cut rates in June 2003, when the central bank lowered interest rates by 25 basis points to 1.00 percent. Gold is moving towards a 26-year high of $730 an ounce struck in May last year and is roughly $130 below its all-time high of $850, fixed in London on January 21, 1980. The metal has regained its footing since tumbling to a seven-week low of $641.10 in mid-August when investors sold gold to raise cash to cover margin calls on losses ignited by a meltdown in the US supreme mortgage market.
Gold was expected to test $720 and recapture last year's peak of $730 but the downside risk remained, said Louis Look, a dealer at Bank of China in Hong Kong. "In case gold retraces below $695, it will trigger stop-loss sales maybe to the $665 level," he said.
Gold's 14-day relative strength index (RSI) has risen above 80 as gold hits highs. It stood at 81.48 on Monday. The market views an RSI of 30 or less as oversold and 70 or more as overbought. Tokyo precious metals rose across the board, reflecting sharp gains in spot metal made during the Japanese public holiday on Monday.
The benchmark August 2008 Tokyo Commodity Exchange gold contract hit a session peak of 2,674 yen a gram the highest for any benchmark since July 24. It was later quoted at 2,672 yen, up 38 yen from Friday's close. The dollar dipped to 114.93 yen, while the euro barely budged near $1.3864, holding near $1.3930 hit last week, the highest since its launch in 1999.
Expectations of an interest rate cut and concerns about slower US economic growth held the dollar down against most major currencies except sterling, which is smarting from the run on deposits at UK lender Northern Rock. In other precious metals, platinum inched up to $1,299/1,304 an ounce from $1,298.30/1,305.30 late in New York. Palladium was little changed $329/334 an ounce from $328.75/332.75 in New York. Silver edged down to $12.72/12.77 an ounce from $12.75/12.80 late in New York.