Mumbai: Gold rallied to a 16-month high after the US dollar tumbled after a surprise 50 basis point cut in the Federal Reserve''s base lending rate to 4.75 per cent.

Spot gold hit a high of $726 an ounce, its highest since May 2006. Prices, however, dipped to $723.60/724.40 an ounce later, still higher than the previous New York close of $719.30/720.30.

Bullish markets had lifted US gold futures to a 28-year high yesterday, with the December gold contract on the Globex electronic platform used by the New York Mercantile Exchange and its COMEX metals division rising to a high of $735.50 an ounce.

Gold hit a 26-year high of $730 in mid-May last year. A rise above that level will bring gold to its highest since January 1980, when the precious metal hit an all-time high of $850 an ounce.

Dealers in Singapore reported purchases of gold bars, which suggested investor confidence of a further increase in prices. Premiums for gold bars were steady in Tokyo at between 25 to 50 US cents an ounce to the spot London price.

The benchmark gold futures on the Tokyo Commodity Exchange for August 2008 delivery rose as high as 2,727 yen a gm - its highest since September 1985.

The contract was later quoted at 2,726 yen, up 54 yen from yesterday''s close.

The dollar fell to a 15-year low against a basket of currencies after the Fed announced a hefty half-point rate cut to help shore up the US economy.

The dollar dropped to 115.80 yen. The euro was slightly weaker at $1.3975 after striking a lifetime high of $1.3989 on electronic trading platform EBS the previous day.
A weaker dollar makes dollar-priced gold cheaper for holders of other currencies and boosts the metal''s appeal as an alternative investment.

Other precious metals also firmed, with platinum rising to its highest in nearly eight weeks, silver hitting a six-week peak and palladium touching its best level in almost a week.

Silver edged up to $13.00/13.05 an ounce from $12.96/13.01 in New York. Platinum rose to $1,305/1,310 an ounce $1,301.30/1,308.30 in late New York. Palladium rose to $330/335 an ounce from $329/333.
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