Gold rose to a new near 18-year high in Europe on Monday, within reach of the next peak at $480 an ounce, on fund buying fuelled by inflation worries and strong physical demand.
Some dealers said the market was becoming vulnerable to profit taking and could even track lower in the short term, but they saw gold extending further gains in the months to come.
After touching $478.50 in European trade - the highest since January 1988 - spot gold retreated to $472.90/473.60 by 1505 GMT. It closed in New York on Friday at $473.80/474.50.
"I think the market is very healthy," said David Holmes, vice president of commodities at RBC Capital Markets. "With investors still waiting on the sidelines to get in, I just don't see the market falling away."
People were not very comfortable with currencies and bond markets and were putting money in safe-haven gold, he said, adding that inflation worries also helped the rally.
The euro eased against the dollar on Monday, giving up earlier gains as investors questioned the reform drive of the new German government due to be formed by conservative leader Angela Merkel.
Initially the euro gained after news that Merkel will become Germany's chancellor under a deal struck with Chancellor Gerhard Schroeder's Social Democrats. The move was seen as ending three weeks of political deadlock since inconclusive polls last month.
The euro was traded at $1.2043.
"The appetite for metal commodities is enormous at the moment," said Stephen Briggs, economist with SG Corporate and Investment Banking.
He said gold's inverse relationship with the dollar had been broken in the last couple of weeks. When the dollar weakened, gold moved up, but the metal did not fell when the US currency strengthened, he added.
A strong US currency makes dollar-priced gold costlier for holders of other currencies and lowers demand.
Many traders and analysts feel gold can hit $500 in the near term, propelled by solid demand for investment and jewellery as well as lofty energy prices and forecasts that there could be less mine production in the near future.
"Gold is now looking set to test even higher with $480 firmly in the funds scopes and despite speculative players sitting on large long positions," TheBulliondesk.com said in a daily report.
Any long liquidation by funds would be seen as a good buying opportunity by physical players, it said.
Latest data from exchange authorities showed that large speculators increased the amount of gold contracts they were holding as of Oct.4.
"While the bull market in the yellow metal appears to be (unrelenting), with much talk of a price north of $500, gold is again approaching overbought status," Standard Bank London said in a report.
"If the dollar resumes its upward path and the immediate threat of terrorist activity recedes gold may be in for a week of consolidation between resistance pegged at $475 and support at $465," Standard Bank said.
Silver probed higher in Asia, rising to 10-month highs, against the background of strength in base metals, notably record high copper.
It rose as high as $7.83 an ounce, the highest since December last year. Spot was quoted at $7.72/7.75, compared with $7.70/7.73 in New York.
Traders said a level of $8.20 an ounce could discourage people from buying, but any drop to about $7.35-$7.45 would attract good demand.
Platinum came closer to the April 2004 peak of $942, a breach of which would take it to its highest level in more than 25 1/2 years. It rose to $936 before falling to $931/934 an ounce. It had closed at $932/935 in New York.
Spot palladium climbed to a 6-month high of $202 an ounce, versus $200/204.
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