Jan. 31 (Bloomberg) -- Gold rose, capping the biggest monthly gain since April 2006, after lower U.S. borrowing costs weakened the dollar, boosting the appeal of the metal as an alternative investment. Silver jumped to the highest since 1980.

The Federal Reserve yesterday reduced the benchmark interest rate 0.5 percentage point to 3 percent after slashing the rate 75 basis points last week in an emergency move to head off a recession. Gold reached a record $942.20 an ounce after the latest announcement. The dollar is down 1.8 percent this month against a weighted basket of six major currencies.

``The 1.25 percentage-point cut is very bearish for the dollar, and that will ultimately drive gold higher,'' said Tom Hartmann, a commodity analyst at Altavest Worldwide Trading Inc. in Mission Viejo, California. ``While the downside risk to the economy may damp physical demand, the attractiveness as a currency hedge will be a much stronger support.''

Gold futures for April delivery rose $1.70, or 0.2 percent, to $928 an ounce on the Comex division of the New York Mercantile Exchange. The metal jumped 11 percent this month.

Silver for March delivery climbed 23.5 cents, or 1.4 percent, to $16.995 an ounce. The price earlier reached $17.09, the highest since December 1980. The price soared 14 percent in January.

The Fed reduced rates 1 percentage point last year because a housing slump and mounting losses in the subprime mortgage market threatened to push the U.S. economy into a recession. The dollar dropped 9.5 percent against the euro in 2007, while gold jumped 31 percent, the most since 1979.

`Banking Crisis'

``Investors believe the Fed will accommodate higher inflation over the medium term to avert a banking crisis and deeper recession,'' said John Kemp, an analyst at Sempra Metals Ltd. in London.

The dollar rose as much as 0.4 percent against the euro after dropping 0.6 percent yesterday.

Gold's gains may be limited on speculation the metal's rally is overdone. The metal's 14-day relative-strength index has been above 70 for five straight sessions, a signal that the price may drop.

``Gold is facing a little sell-off after such a big run up,'' said Marty McNeill, a trader at R.F. Lafferty Inc. in New York.

To contact the reporter on this story: Pham-Duy Nguyen in Seattle at pnguyen@bloomberg.net.

Last Updated: January 31, 2008 14:33 EST