By Pham-Duy Nguyen (Bloomberg)

Gold rose after U.S. and European central banks joined to add cash to the banking system, boosting the appeal of the precious metal as hedge against inflation. Silver fell.

The Fed said it would ease short-term funding pressures by injecting cash to banks through auctions and providing $24 billion in currency swap lines to the European Central Bank and Swiss National Bank. Gold has gained 28 percent this year as record energy costs and a slumping dollar sent consumer prices higher.

"Inflationary pressures are becoming a secondary concern for the Fed,'' said Stephen Platt, a commodity analyst at Archer Financial Services Inc. in Chicago. "Injecting liquidity will tend to exacerbate inflationary pressures that are already in the system. This will work in gold's favor.''

Gold futures for February delivery rose $1.70, or 0.2 percent, to $818.80 an ounce on the Comex division of the New York Mercantile Exchange. The price earlier gained as much as $5.70. Before the Fed's announcement, gold had dropped as much as $14.90.

The Fed said it authorized "temporary reciprocal currency arrangements,'' or swap lines, for as long as six months with the ECB for as much as $20 billion and $4 billion to the SNB Bank "for use in their jurisdictions.''

The Fed also plans four auctions, including two this month, that will add as much as $40 billion to increase cash in the U.S. The dollar fell against the euro after the announcement.

Gold reached $848 an ounce on Nov. 7, the highest in 27 years, as the dollar headed to a record low of $1.4967 against the euro on Nov. 23.

"Each dollar that's created devalues each dollar that's already in existence, and that's the definition of inflation,'' said Michael Pento, senior market strategist for Delta Global Advisors Inc. in Huntington Beach, California, which manages about $1.3 billion. "This is excellent for gold. Gold is real money. Gold's purchasing power remains constant.''

The Fed yesterday lowered the overnight lending rate 0.25 percentage point to 4.25 percent, the third reduction this year. Gold has rallied 13 percent since the Fed first cut the benchmark rate on Sept. 18. Before that, the Fed had held borrowing costs steady since June 2006.

Investment in the StreetTracks Gold Trust, the biggest exchange-traded fund backed by bullion, reached a record 615 metric tons on Dec. 10.

"Precious metals is probably one of the best areas to be in now because it's a hedge against inflation,'' Pento said. `"Early in 2008, we'll see the nominal high of $850 for gold and we could get a handle on $900 by year-end. For sure, the path of least resistance for gold is higher.''

Gold's gains may be limited should a global economic slowdown damp demand for precious metals and commodities, analysts said. Silver, which has wider industrial applications than gold, fell. Copper dropped as much as 3.5 percent.

"Speculative money doesn't necessarily want to commit to gold now because of the uncertainty over the economy,'' said Ron Goodis, futures trading director at Equidex Brokerage Group Inc. in Closter, New Jersey. "Demand for everything eases because of a potential slowdown in the economy.''

Silver for March delivery dropped 4 cents, or 0.3 percent, to $14.825 an ounce. The metal has gained 15 percent this year.