Gold steadied in late European trade on Wednesday after rising to a three-week high, but funds and investors were seen pushing the market higher on continued worries about inflation and currency markets.
The metal might target last month's near-25-year high of $540.90 an ounce in the coming days as people were seen investing into gold, hoping for better returns than financial markets, dealers said.
"The market continues to benefit from fund inflows and everything is being regarded as bullish for the price," said Alan Williamson, analyst at HSBC Bank.
"The obvious target would be the 2005 high...I think that's what the market is looking for."
Spot gold, supported by a weak dollar and high oil prices, touched $535.30 in Asian trade before easing to $530.20/531.00 by 1547 GMT. Prices were volatile last week due to thin trading.
The metal finished at $530.30/531.10 in New York late on Tuesday, when its jumped about $13 from the previous close.
Jeremy East, global head of precious metals at Commerzbank, said it was a bull market at the moment and every drop in prices would attract new buying.
Gold is forecast to gain further in 2006 as funds and investors see it as a haven amid worries about inflation and economic growth. Prices have almost doubled in five years.
The dollar hit a two-month low against the euro on growing expectations that the Federal Reserve might soon end its 18-month campaign of raising US interest rates.
Oil dipped on Wednesday after Russia and Ukraine settled a natural gas supply dispute, but prices retained most of their recent sharp gains amid a fresh infusion of investor funds.
A weak dollar generally lifts buying of gold as the metal becomes cheaper for other currency holders. Gold is also seen as a hedge against inflation.
"Going into 2006, we maintain our positive view towards gold and note that prices have the potential to top $600/ounce in the course of this year, strongly influenced by the still massive funds floating around globally," Macquarie Research said.
Barclays Capital said in a report that there was a 7.9 percent surge in HUI Gold Bugs Index to an all time high of 298.77 on Tuesday. The index of largely unhedged gold companies has often been seen as an indicator of sentiment towards gold.
In other precious metals, silver rose as high as $9.23 an ounce to match a level attained on December 12, when it touched its highest since May 1987. It was later quoted at $9.03/9.06, down from $9.11/9.14 late in New York.
Platinum rose to a three-week high at $992/997 before easing to $990/995 from, against $975/978 late in the US market, while palladium was up at $269/274 from $264/268.
Palladium was lifted by reports that North American Palladium Ltd would temporarily shut down a crusher at its Lac des Iles palladium mine in Ontario, resuming full production by the end of the week.
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