Gold touched a 16-month high on Monday as investors heavily bought the precious metal on expectations the US Federal Reserve will cut interest rates, which may lift bullion's appeal.
The Fed is widely expected to trim its benchmark interest rate by at least 25 basis points on Tuesday to help cushion the economy from the impact of the credit squeeze and housing slump. Lower interest rates tend to make the dollar less attractive and often boost gold's safe-haven appeal.
The metal is closing in on a 26-year high of $730 an ounce hit in May last year and is roughly $130 below its all-time high of $850, fixed in London on January 21, 1980. Spot gold rose as high as $719.65 an ounce and was quoted at $716.70/717.50 by 3:03 pm EDT (1903 GMT), against $707.30/708.10 in New York late on Friday.
Most-active December gold on the COMEX division of the New York Mercantile Exchange settled up $6 at $723.80 an ounce, trading between $714.80 and $728.90 - a 14-month high. "The weaker dollar is helping precious metals and certainly encouraging people in stronger currency regions," said Nick Moore, metals analyst at ABN Amro.
The dollar stabilised around half a cent away from last week's record lows versus the euro. Worries about the wider implications of the US subprime mortgage crisis - and the credit crunch that it sparked - were fanned by news last week that major UK mortgage lender Northern Rock became the latest victim of tighter liquidity.
"As gold prices continue to exhibit a strong inverse relationship to the US dollar, increased risks towards a weaker dollar ... on increasing concerns over US growth and expectations of a persistent moderation in foreign demand for US credit products present further upside risk to gold prices," Goldman Sachs said in a report.
Gold has rebounded about 10 percent from a seven-week low reached in mid-August. It hit a low of $641.10, when investors sold gold to raise cash to cover margin calls on losses triggered by a meltdown in the US subprime mortgage market.
"My gut feeling is when the dust really starts to settle in this subprime issue, gold will be even more attractive as an asset which is not really subject to a credit crunch," said Darren Heathcote of Investec Australia in Sydney. "It's holding on to its safe-haven status for the time being. Physical buying is still relatively strong," he said.
Maurizio Castro, director general of the Vicenza fair that hosts international jewellery trade fairs, said Italy's once-dominant jewellery sector was set for a turnaround in 2008 after several years of falling sales and output as its shift toward high-end production begins to bear fruit.
But some traders said gold might fall as net long, or bullish, positions in US futures surged to 16.092 million ounces in the week to September 11 from 12.435 million a week ago.
"I think it is a bit overdone on the upside. Friday's failure to close at the highs and the huge amount of long positions could trigger some selling and bring it back to the $700 area," said a European precious metals trader.
"But medium-term, I'm still positive for gold." Platinum hit an intraday low of $1,262 an ounce, its lowest level since August 31, in Asian trade as Japanese players were away from the market due to a public holiday. It was last quoted at $1,298.30/1,305.30, versus $1,297/1,302 late in the US market on Friday.
Palladium fell to $328.75/332.75 from its previous finish of $330/334, while silver rose to $12.75/12.80, up from its late New York quote of $12.52/12.57 on Friday.
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