NEW YORK, Jan 22 U.S. gold futures turned 1 percent higher in choppy trade on Tuesday after heavy initial losses, as an emergency rate cut by the Federal Reserve and safe-haven buying offset initial liquidation by commodity funds after a sell-off in global stocks.
By midmorning, U.S. stocks also sharply narrowed their losses, extending support to the precious metals market.
Gold should be supported by inflation concern due to possible further rate cuts, and as investors seek safety amid volatile equities markets, market-watchers said.
The Federal Reserve on Tuesday slashed benchmark interest rates by a hefty three-quarters of a percentage point, the biggest rate cut in more than 23 years, in an emergency bid to boost the U.S. economy some fear is on the verge of recession.
"Normally, gold and silver would be helped (after the rate cut), but funds needing cash are selling liquid metals," said George Gero, vice president of RBC Capital Markets Global Futures in New York.
At 10:45 a.m. EST (1545 GMT), the active gold contract for February delivery at the COMEX division of the New York Mercantile Exchange GCG8 was up $10.20 or 1.2 percent at $891.90 an ounce. It peaked at $893.00.
In the overnight sessions, February futures hit a three-week low of $849.50, as investors exited the precious metals market and opted for cash following the global stock sell-off rout which began on Monday.
The U.S. gold futures market was shut on Monday due to the Martin Luther King Jr Day holiday.
The Fed took the key federal funds rate, which governs overnight lending between banks, down to 3.5 percent, its lowest level since September 2005. The Fed also lowered the discount rate it charges on direct loans to banks to 4 percent.
Fed policy-makers are scheduled to meet on Jan. 29-30 and, in the wake of the central bank's bold rate cut on Tuesday, financial markets were expecting the Fed to lower borrowing costs again by at least a quarter of a point. [ID:nN22181874]
Gold prices should recover as the precious metal's appeal as a hedge against inflation was boosted, as the Fed is now more concerned with the stock markets than keeping inflation in check, Gero said.
Analysts said that increased volatility in the world financial markets and a possible recession in the U.S. economy could boost flight-to-quality buying in gold.
"I take the slightly more downbeat view, they (Fed) must know of something going on and things are a lot worse than even the worst bears had thought, that the economy really is in recession going from bad to worse," said Robin Bhar, UBS metals analyst in London.
"This smacks of panic and desperation, but is obviously bullish for gold as interest rate cuts make gold more attractive," Bhar said.
Spot gold XAU= was quoted at $892.10/892.80 an ounce, compared with Friday's New York close of $881.90/882.60. London bullion dealers fixed the afternoon spot reference price at $875.
COMEX March silver SIH8 was down 7.0 cents at $16.145 an ounce, trading from $15.255 to $16.295.
Spot silver XAG= was at $16.06/16.09 versus $16.14/16.19 late Friday. London silver was fixed at $15.57.
April platinum PLJ8 dropped $15.50 or 1 percent to $1,550.00 an ounce. Spot platinum XPT= was quoted at $1,544/$1,549.
March palladium PAH8 fell $8.60 or 2.3 percent to $366.45 an ounce and spot palladium XPD= fetched $362.50/$367.50 (Reporting by Frank Tang, editing by Matthew Lewis)
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