News and Market Updates

Gold futures fall, but hold above $720 an ounce

Traders eye dollar, stock market as they await U.S. Fed interest rate decision

MarketWatch

Last Update: 10:32 AM ET Sep 18, 2007

 

SAN FRANCISCO (MarketWatch) -- Gold futures fell Tuesday morning below the fresh 16-month high in overnight electronic trading, but held their ground above $720 an ounce as traders awaited the Federal Reserve's decision on U.S. interest rates due later in the session.

 

Gold for December delivery was last down $2.40 at $721.40 an ounce on the New York Mercantile Exchange. It touched a high of $730.50 in overnight electronic trading.

On Monday, gold futures closed up $6 at $723.80 an ounce, which was above the peak close of $721.50 seen in May of 2006 for a lead-month contract. The June contract last year climbed as high as $732 in electronic trading.

 

"Today the focus is on the Fed's rate decision, with the expected 25 or 50 basis point cut likely to see the dollar weaken further in the mid to longer-term," said James Moore, The decision is set for 2:15 pm Eastern, shortly after regular futures trading for gold closes on Nymex.

 

The Federal Reserve is expected to ease policy but also take further action to signal the availability of liquidity to markets through a further reduction in its discount rate. Most economists think the central bank will cut by a quarter-percentage point to 5.0%, but some expect a half-percentage point.

 

"Short-term gold may need to consolidate in order to match and potentially breach last May's $732 high after yesterday's gains pushed the metal back into overbought territory on the charts," Moore said.

 

Overall, sentiment remains bullish as the knock-on effect of the sub-prime and credit crisis continues to attract safe-haven buying, he said. A rate cut of 25 or 50 basis points will likely lead to another short-term rally in stocks and a larger rally will result from a larger cut, according to Mark O'Byrne, director at Gold and Silver Investments Ltd.

"However, further retrenchment due to the credit crisis and slowing U.S. economy is likely in the medium term," he said.

 

But Ned Schmidt, editor of the Value View Gold Report, considers gold as "seriously over bought" as a result of expectations for lower U.S. interest rates and financial concerns in the U.K. He said a correction to $680-$690 for gold prices is likely after the Fed announcement. But whatever the Fed does is "good for gold investors," he said in emailed remarks. If rates are cut, it'll confirm monetary will at the Fed and assure a new high for gold by year end, he said.

 

And if rates are left unchanged, the "housing and mortgage debacle will continue to dominate financial markets," he said. "Gold is the only safe haven in such an environment."

Given all that, Schmidt said $1,400-plus gold prices are "no longer a dream, but a reasonable expectation."