LONDON, Mar. 19, 2008 (Thomson Financial delivered by Newstex) -- Gold dropped by 5 pct as a firmer dollar and widespread profit-taking knocked the precious metal lower after yesterday's rate cut decision from the US Federal Reserve.

The Fed's 75 basis point cut has boosted the dollar, with many currency traders having priced in a bigger drop, while signs the Fed are not immune to inflation concerns has reduced the likelihood for further big cuts. A stronger dollar should weigh on gold, which is used as an alternative investment to the US currency.

'The US rate cut decision has been a trigger for a correction in gold,' said Standard Chartered analyst Helen Henton. 'There's been some disappointment as some people were looking for a bigger cut, and with gold having risen so quickly lately it's come down to a healthier level.'
She said a fall in demand from India, the world's largest buyer of gold jewellery, had also occurred with prices at such high levels.

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Bharghav Vaidya, proprietor of Mumbai-based trading house Bharghav Vaidya and Associates said physical buying should pick up if prices drop to around 940 usd an ounce.

At 1.54 pm, spot gold was trading at 955.70 usd an ounce against 1,003.70 usd in late New York trade yesterday.

Gold hit an all-time high of 1,032.50 usd an ounce on Monday after fire sale of Bear Stearns (NYSE:BSC) , but has since been pressured lower by profit-taking in volatile trade.

Gold has rallied by around 50 pct since the onset of the credit crunch in late July, on what some have described as a 'perfect storm' for the metal, with a weak dollar, rising inflation and widespread economic fears all encouraging investors to buy bullion.

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