Gold and fuel oil futures surged to record highs in Shanghai yesterday on anticipation of more US dollar depreciation triggered by today's expected US interest rate cut.

The most actively traded gold futures contract for delivery in June on the Shanghai Futures Exchange (SHFE) rose 1.91 percent to 232.36 yuan per gram, its highest since the market opened on Jan 10. The contract surged to 233.59 yuan during trading yesterday.

Meanwhile, the most actively traded fuel oil futures contract for delivery in June on the SHFE soared 2.62 percent to 4,461 yuan per ton, with transaction volume up 194 percent to 126,956 hands of 10 tons each.

On the New York Mercantile Exchange (NYMEX), the most actively traded gold futures contract for delivery in April climbed to $1,033.9 per ounce before falling slightly to a record $1,024. The NYMEX's most actively traded crude oil futures contract for delivery in April also hit a high of $111.8 per barrel in electronic trading before edging down to $110.83 at 5pm Beijing time.

Analysts said the gold and fuel oil futures surge was triggered by expectation of a US Federal Reserve interest rate cut today. The Fed is likely to cut the interest rate to help stabilize the financial market, which has been battered by worsening credit problems. Analysts expect the interest rate cut will be larger than the previous ones and is likely to further depress the already weak US currency.

This has triggered a rush of investor capital into commodities that are traded in US dollars. Fu Jing, an analyst at Qianhe Gold Investment Co, said a large chunk of capital in global markets is being channeled into commodities, particularly gold and oil.

"Heightened fears about a possible US-led economic recession have driven many investors to seek refuge in gold and oil," Fu said. Li Jingyuan, an analyst at Haitong Futures Co, agreed. "A lot of capital is being plunged into commodities," he said.

Fu and other analysts said the shift from equities and other financial instruments to commodities is likely to continue in the coming months. "There are signs institutional investors and global hedge funds are increasing their investments in commodities," Fu said. "They are buying gold to hedge against risks amid expected US dollar depreciation."

(China Daily March 18, 2008)