By Millie Munshi

Aug. 10 (Bloomberg) -- Gold prices rallied in New York, erasing an earlier drop, after the Federal Reserve said it would buy more U.S. government debt.

The central bank said it would reinvest principal payments on its mortgage holdings into long-term Treasury securities in a bid to bolster growth. Gold prices have gained 27 percent in the past 12 months, reaching a record $1,266.50 an ounce on June 21, on speculation that record-low borrowing costs and government stimulus programs would spur inflation.

“If the Fed keeps printing money to buy more debt, it’s going to be positive for gold,” said Michael K. Smith, the president of T&K Futures & Options in Port St. Lucie, Florida. “Gold is going to keep going higher. It’s an excellent investment.”

Gold futures for December delivery traded at $1,207.60 an ounce as of 3:12 p.m. in electronic trading on the Comex in New York.

Earlier, prices fell as much as 0.8 percent as the dollar climbed against a basket of six currencies. Before the central bank announcement, the December gold contract settled at $1,198 after the 1:30 p.m. close of regular trading on the Comex, down 0.4 percent. The greenback erased its gains after the Fed release.

Silver futures for September delivery declined 8.4 cents, or 0.5 percent, to $18.158 an ounce at the close of regular trading. After the Fed announcement, silver rebounded, trading as high as $18.475.

Platinum futures for October delivery dropped $5.90, or 0.4 percent, to settle at $1,537 an ounce on the New York Mercantile Exchange. After the Fed announcement, prices were trading higher at $1,544.50.

Palladium futures for September delivery fell $9.05, or 1.9 percent, to close at $470.60 an ounce.

Platinum and palladium, used in jewelry and pollution- control devices in cars, were down for the sixth straight session.

--Editors: Steve Stroth, Daniel Enoch.

To contact the reporter on this story: Millie Munshi in New York at mmunshi@bloomberg.net.

To contact the editor responsible for this story: Steve Stroth at sstroth@bloomberg.net

Source: http://www.businessweek.com/news/2010-08-10/gold-rallies-on-speculation-fed-debt-purchase-to-spur-inflation.html