Dec. 16 (Bloomberg) -- Gold rose in New York as the dollar weakened, boosting the appeal of the precious metal as an alternative investment. Silver also gained.

The dollar fell to a two-month low against the euro on expectations that the Federal Reserve will cut its federal funds target rate 50 basis points to 0.5 percent, the lowest since at least 1958. Gold rallied to a record in March as rate cuts sent the dollar to an all-time low against the euro in July.

“If the Fed has to keep rates very low for a long time, that’s going to be awful for the dollar and very good for gold,” said Matt Zeman, a metals trader at LaSalle Futures Group in Chicago.

Gold futures for February delivery rose $6.20, or 0.7 percent, to $842.70 an ounce on the Comex division of the New York Mercantile Exchange. The metal reached $843.70 yesterday, the highest price since mid-October.

Silver futures for March delivery gained 8.5 cents, or 0.8 percent, to $10.705 an ounce. The metal is still down 28 percent this year while gold has risen 0.5 percent.

The Fed began slashing rates in September 2007 from 5.25 percent as the economy headed into a recession. Gold’s gains may be limited as some investors already have built a rate cut into the price, some analysts said.

“The move should be rather symbolic, as effective Fed funds have been trading below the target rate of 1 percent since the last cut was made,” said Tom Pawlicki, an analyst at MF Global Ltd. in Chicago. “The excess liquidity has been added through the Fed’s program of quantitative easing.”

The Fed has committed to spend as much as $800 billion under two programs to help ease the credit crisis.

Falling Consumer Costs

Investors also may sell gold in the near-term after the Labor Department reported U.S. consumer costs fell 1.7 percent in November, the most on record. Some investors buy gold to hedge against accelerating prices. The metal rose 31 percent in 2007, as consumer costs rose the most in almost two decades.

“In the very short term, inflation is no longer an issue,” Zeman said. “If commodities continue to go down, that’s going to put a damper on gold.”

Technical charts show gold is in a bear market, said Dennis Gartman, an economist and editor of the Gartman Letter in Suffolk, Virgina.

“Since the high made in March, each high has been progressively lower and so too each low,” Gartman said. “This is not a market to buy. This is a market to sell.”

Gold reached a record $1,033.90 on March 17.

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

Last Updated: December 16, 2008 14:04 EST