Gold Advances in London as Dollar Weakens Before Rate Decision

By Rachel Graham

Oct. 29 (Bloomberg) -- Gold rose for a second day in London as the dollar fell against the euro, buoying demand for the metal as an alternative to the U.S. currency. Silver gained.

The dollar fell for a second day on expectations the Federal Reserve will cut interest rates today. The relationship between gold and the euro-dollar exchange rate has strengthened this year, with a correlation of 0.58, compared with 0.52 a year earlier. A figure of 1 would mean the two moved in lockstep.

``It's a buying opportunity for gold,'' Liran Kapeluto, a senior dealer at trading-system operator Finotec Trading U.K. Ltd., said by phone from London. ``The selling pressure on the dollar is high.''

Gold for immediate delivery added $12.20, or 1.6 percent, to $759.15 an ounce by 1:05 p.m. in London. Futures for December added $18.40, or 2.5 percent, to $759.90 in electronic trading on the Comex division of the New York Mercantile Exchange.

Cuts in interest rates will also add to demand for gold as a hedge against inflation because some investors buy the commodity as a store of value when the buying power of money slides.

``If interest rates are low, money is very cheap and it's very easy to create an inflation bubble,'' Kapeluto said.

The Fed's benchmark rate may be cut by half a point to 1 percent, according to the median forecast of economists surveyed by Bloomberg News. The Fed has already cut the key borrowing cost from 5.25 percent in the past 13 months.

Among other metals for immediate delivery, silver rose 54.5 cents, or 5.9 percent, to $9.745 an ounce. Platinum added $11.75, or 1.5 percent, to $822.75 an ounce and palladium gained $8.50, or 4.7 percent, to $190.

To contact the reporter on this story: Rachel Graham in London at rgraham13@bloomberg.net