LONDON, Sept 18: Gold surged to a 16-month high on Tuesday, with sentiment bullish ahead of an expected interest rate cut by the US Federal Reserve and on record high oil prices, dealers said.

The Fed is expected to slash its benchmark 5.25 per cent fed funds rate by at least 25 basis points at 1815 GMT on Tuesday to help cushion the US economy from credit market turmoil and a housing market slowdown.

Lower interest rates tend to make the dollar less attractive and often boost gold’s appeal as an alternative investment.

If the Fed did cut rates, and its statements sort of implied that there could be further rate cuts, then I think that would be positive for the gold price, said David Moore, a commodity strategist at the Commonwealth Bank of Australia.

Spot gold rose as high as $720.05 an ounce and was at $719.75/720.45 against $716.80/717.60 late in New York on Monday.

Gold is moving towards a 26-year high of $730 an ounce struck in May last year and is roughly $130 below its all-time high of $850, fixed in London on Jan. 21, 1980.

The hedge funds were really disillusioned and they waited until gold found its own direction and when it recovered a little bit and triggered at certain point, they started piling back in. Now suddenly everybody is super-bullishsaid Stephen Briggs, economist at SG Corporate and Investment banking.

The Fed decision is important. Until quite recently the market was pricing a very high probability of 50 basis points.

The metal has regained its footing since tumbling to a seven-week low of $641.10 in mid-August, when investors sold gold to raise cash to cover margin calls on losses ignited by a meltdown in the US subprime mortgage market.

Gold was also supported by strong oil prices, which jumped to a record high above $81 a barrel, drawing strength from concerns of a winter supply squeeze in the world’s top consumer, the United States.

Gold is used as a hedge against oil-led inflation, while a lower dollar makes gold, denominated in dollars, cheaper for holders of other currencies.

Gold is seen as an alternative form of money for investors who are bearish on the US currency.—Reuters