* Gold rises above $850 after Fed cuts rates to near zero
* Euro jumps to $1.41 against euro, boosting bullion
* U.S. stocks broadly jump 5 pct on optimism after Fed
(Recasts, updates prices, market activity to close; new
byline, changes dateline, previously LONDON)
By Frank Tang
NEW YORK, Dec 16 (Reuters) - Gold rallied above $850 an
ounce on Tuesday after the Federal Reserve slashed U.S.
interest rates to fight a global economic slowdown, bolstering
bullion's appeal as a hedge against inflation.
The U.S. Federal Reserve cut its target for overnight rates
to a record low zero to 0.25 percent, and said it would employ
"all available tools" to dispel a year-long recession.
"They are going to have to let the economy inflate much
longer than they normally would. Longer term, it's going to
build an inflationary bubble, and it's going to make the last
five years look very paltry," said Frank McGhee, head precious
metals trader of Integrated Brokerage Services.
Spot gold <XAU=> was last at $856.60 at 4:00 p.m. EST (2100
GMT), up 2.2 percent from $837.80 an ounce late on Monday in
New York.
U.S. February <GCG9> gold rose nearly 3 percent to a
two-month high of $860.80 an ounce on the COMEX division of the
New York Mercantile Exchange, after settling up $6.20 to
$842.70 prior to the Fed announcement.
"Lower interest rates reduce the opportunity cost of
holding gold," said Standard Chartered analyst Daniel Smith.
"If you look at bonds as well, yields are low," he added.
"That again means the opportunity cost of holding other things
is much lower than it was."
Even as fears of deflation prompted the Fed to slash rates,
gold retained its allure as an inflation hedge among investors
watching central banks flood financial markets with money.
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U.S. stocks rallied, with the blue-chip heavy Dow Jones
industrial average up nearly 400 points. [] The dollar
tumbled against the euro after the rate cut. The euro rose
above $1.41, more than 5 cents above its session trough.
[]
"Whether the Fed cuts by quarter of a point, half a point,
or three quarters of a point, it is all heading in the same
direction, which is interest rates trending towards zero," said
RBS Global Banking & Markets strategist Stephen Briggs.
Gold is often bought as an alternative asset to the dollar
and tends to move in the opposite direction to it.
ETF HOLDINGS FIRM
Investors remained interested in gold exchange-traded
funds. The world's largest gold ETF, the SPDR Gold Trust <GLD>
said its holdings rose by just over three tonnes on Monday.
[]
Among other precious metals, platinum <XPT=> was at $857.50
an ounce, up 5 percent from its previous finish of $817 in New
York late on Monday. Palladium <XPD=> was at $178.00 which was
4.1 percent above Monday's late quote of $171.
Traders are awaiting more news on a mooted U.S. plan to
bail out beleaguered carmakers, the main buyers of platinum.
Platinum reached parity with gold for the first time since
1996 on Thursday, and is holding just below the yellow metal.
Spot silver <XAG=> was at $11.11, which was 4.6 percent
higher than its Monday close of $10.62.
(Additional reporting by Jan Harvey in London; Editing by
David Gregorio)
