Gold spiked above $500 an ounce for the first time in 18 years on Tuesday and platinum surpassed $1,000, the highest in more than two-and-a-half decades, fuelled by heavy fund buying.
The metals then retreated from their highs, but growing demand, supply constraints and plans by some central banks to buy more gold were expected to support prices, dealers said.
"Technical trends are looking very strong and people find it very risky to go short right now. I think that's why the rally has been continuing," said Yingxi Yu, precious metals analyst at Barclays Capital.
The positive sentiment was still intact and bearish factors such as easing oil prices and low physical demand at higher prices were being ignored in a bull market, she said.
Spot gold retreated to $497.00/497.80 an ounce by 1654 GMT from as high as $502.30 an ounce in Asia. It closed in New York on Monday at $498.20/499.00.
Analysts said investment funds were increasing their exposure in commodities for better returns, and the trend was likely to continue despite huge speculative long positions.
Gold has risen more than 14 percent so far this year.
"Over time, over history, it has always been a market that people have turned to when there has been an element of uncertainty in other asset classes," said Mark Keenan, fund manager at UK-based MPC Commodity Fund.
"It's a question of diversification."
Robin Edwards, president of Sabre Fund Management, said people were getting interested in gold as there were inflation fears, though it was hard to say whether that would be realised.
He said gold prices could soar up to $800 an ounce over the next couple of years as the metal had supportive fundamentals.
"The investors are diversifying portfolios. There is a feeling that currencies and equities are not necessarily reliable and they are adding to commodities because they see the returns are greater there," said Peter Hillyard, head of metals sales, at ANZ Investment Bank.
Industry players said jewellery manufacturers and buyers may need time to adjust to the high prices.
The World Gold Council said this month that global demand for gold in the third quarter totalled 838 tonnes, a rise of 7 percent from the same quarter a year ago, as surging investment demand helped offset a slowdown from the jewellery sector.
Some analysts said gold prices could fall to as low as $475 an ounce on liquidation by investment funds to book profits.
The latest weekly Commitments of Traders report issued by the Commodity Futures Trading Commission on Monday showed the speculative net long position in New York's COMEX gold were closer to record high levels.
But the rally was also helped by reports that Russia, Argentina and South Africa had decided to increase the amount of gold in their reserves, reversing a six-year trend of central bank sales, mainly from Europe.
Platinum stood at $992/995 an ounce after spiking earlier to $1,002. It closed in New York at $989/993.
Refining and chemical company Johnson Matthey, which provides fundamental analysis of platinum group metals, said in a recent report that 6.71 million ounces of platinum would be used in 2005, exceeding supply of 6.59 million ounces as demand rises from the auto sector and other industries.
Silver inched down to $8.26/8.28 an ounce from $8.35 on Tuesday. A breach of $8.43 would make the price highest in 18 years. Silver finished in New York at $8.35/8.37.
Palladium rose to $263/267 from $261/264.
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