Gold hits record on rate cut hope; eyes $900

By Frank Tang

NEW YORK (Reuters) - Gold set a record high near $900 an ounce and silver surged to a 27-year peak on Thursday, as funds poured money after comments by the Federal Reserve Chairman Ben Bernanke triggered speculation of further rate cuts and a dollar slide.

"The rate cut (speculation) has been driving the gold market through its impact on the dollar. I expect more of the same going forward," said Thomas Winmill, portfolio manager of Midas Fund MIDSX.O in New York, which oversees $265 million of assets under management.

Spot gold XAU= hit a record peak of $894.90, after falling early to as low as $866 an ounce on profit taking. It was quoted at $889.90/890.60 an ounce by New York's last quote at 2:15 p.m. EST (3:15 p.m. EST), against $877.70/878.50 late in New York on Wednesday.

Bernanke on Thursday said the U.S. central bank was ready to act aggressively to counter a deep housing slump and credit market strains that were putting economic growth at risk.

A rate cut lowers the return of treasury bonds and other fixed-income investments, making gold and stocks more attractive.

Shortly after the release of Bernanke's comments, gold and gold futures accelerated gains, as the dollar slid against major currencies in anticipation of further rate cuts.

"At this particular point, it's all on anticipation of lower U.S. interest rates," said Frank McGhee, head precious metals trader of Integrated Brokerage Services in Chicago.

Bernanke's remarks were in contrast to those of his European Central Bank counterpart, Jean-Claude Trichet. Trichet, citing persistent inflation pressures, indicated further policy tightening was likely in the euro zone, giving additional impetus to the euro.

"The relevant things today are that the ECB said they are going to be vigilant and tight, and Bernanke said that they are ready to take significant action to support growth and help the economy out," said Axel Merk, portfolio manager of Merk Hard Currency Fund in Palo Alto, California, which manages $250 million of assets.

Recent grim U.S. manufacturing and employment data has intensified the likelihood of a Fed rate cut later this month.

"I think people are realizing now that we are in a recession, or if we are not in one, we are heading into one. There is very little the Fed can do about it, but there is a lot the Fed wants to do about it," Merk said.

Gold, which gained more than 30 percent in 2007, entered the new year on a firm note, rising more than 7 percent on a combination of bullish factors including a struggling dollar and record high crude oil prices.

In other bullion markets, Shanghai gold futures <0#SHAU:> fell 3.7 percent as some investors sold positions a day after the contract rallied 6.3 percent at its debut.

The key Tokyo gold futures contract for December 2008 delivery <0#JAU:> ended 17 yen per gram lower at 3,117 yen.

FED COULD DISAPPOINT