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Gold drops 2% percent after Fed cuts less than expected

Gold fell more than 2% on Wednesday after a less than expected 75 basis points interest rate cut by the US Federal Reserve boosted the dollar, lifted stocks and dimmed bullion's appeal as an alternative investment.

But bullion's drop stirred up trade in the physical sector, with jewelers in the region purchasing gold bars from dealers in Singapore, a centre for bullion trading in Southeast Asia.

Gold hit a low of $980.80 ounce, down from $1,002.30/1,003.10 an ounce late in New York on Tuesday, when it tumbled to its lowest in nearly a week at $977.80. It struck a record at $1,030.80 an ounce on Monday.

Gold has risen more than 23% in 2008 on fears of inflation as crude oil hit records, hopes of further rate cuts and deepening US financial concerns. Some investors had bet the Fed could cut by as much as 100 basis points.

“Whilst bullion prices may have suffered overnight, in the longer term the increasing threat of inflation will help to support prices and could drive it back towards its recent all-time high,” said Investec Australia in a daily report.

Silver and palladium hovered below recent highs. Platinum was well below its record high but still supported by disruptions in power supply in main producer South Africa. The dollar dropped against the yen on Wednesday as investors booked profits a day after the US currency posted its biggest one-day gain against the yen in a decade after the Fed rate cut.

Lower rates typically reduce the attractiveness of dollar-denominated securities and curb demand for the dollars to buy them. Japan's Nikkei share average (N225) jumped 2.5% to track gains on Wall Street after the interest rate cut.

“It looks like hedge funds are selling, so the market may go down further for today and tomorrow. I think $1,025 is the high but it may be difficult to touch, but if gold breaks $996, then it will be good for the bulls,” said a dealer in Singapore.

Gold futures for April delivery on the COMEX division of the New York Mercantile Exchange fell $13.9 an ounce to $990.4 an ounce, off Monday's record of $1,033.90.

“The market may still go lower but the fall may be limited because it has always bounced back. Physical demand is very good. We've got a lot of buyers from Thailand, Vietnam and Indonesia,” said another dealer in Singapore.

Gold bars were on par with spot London prices, steady from last week.

Spot platinum was at $1,960/1,970 an ounce, unchanged from late New York levels - well below an historical high of $2,290 an ounce hit on March 4.

The most active Tokyo platinum futures ended ¥54 per gram higher at ¥6,045 in a technical rebound after falling by the ¥300 daily limit on Tuesday.

Silver edged up to $19.88/19.90 an ounce from $19.76/19.81 an ounce. Spot palladium fell to $470/476 an ounce from $477/482 an ounce. (Reuters)