Gold gained in Europe on Monday to trade near 28-year highs, with the dollar's decline to record lows encouraging bullion purchases by investors and speculators. But sharp upside moves in recent weeks and growing bullish positions on US gold futures were making the metal increasing vulnerable to a correction, analysts said.
Spot gold rose as high as $736.05 an ounce and was at $733.40/734.20 by 1419 GMT, against $731.60/732.40 in New York late on Friday, when it hit an intraday high of $739 - the highest since January 1980.
"Gold is doing quite well and we see a very steady uptrend at the moment, but we expect a small consolidation at some stage," said Michael Kempinski, senior trader at Commerzbank.
"The dollar is one of the main factors nowadays. Our target is $750 and I don't think we have to wait more than two weeks for that," he said adding, inflation fears and gold's safe-haven appeal were good reasons to buy gold.
The dollar hit a record low against the euro for a third straight session, hurt by worries of possible further interest rate cuts and sluggish economic growth in the United States.
"The continued weakness of the US dollar against the euro and other currencies is likely to remain the driving force for gold," Dresdner Kleinwort said in a daily research note.
A weaker dollar makes gold cheaper for other currency holders and often lifts bullion demand. The metal is also generally seen as a hedge against inflation. Some traders said a drop in oil prices, which fell below $81 a barrel from record highs last week, might cap gains.
"We believe that near-term US dollar weakness will see gold hit our three-month target price of $750/oz, perhaps within the next week," said John Reade, head of metals strategy at UBS Investment Bank.
"But further strong short-term gains from there are harder to see and a speculative-led correction seems likely in the next month or so ... Any signs of a bounce in the US dollar will likely provoke heavy profit taking in gold," he said in a note.
Analysts said investors should not ignore large speculative positions. In the week to September 18, futures speculators had net long positions of 20.4 million ounces - not far from an all-time high of 22.76 million in September 2005.
Gold spiked to a record high of $850 in January 1980 when investors bought the metal heavily on high inflation linked to strong oil prices, Soviet intervention in Afghanistan and the impact of the Iranian revolution. Goldman Sachs raised its gold forecast to $775 an ounce in three months from its earlier prediction of $700. It saw prices at $800 in six months and at $750 in a year from an earlier forecast of $715 and $725 respectively.
The metal has surged more than $100 or 17 percent this year. In other bullion markets, the most-active December gold contract on the COMEX division of the New York Mercantile Exchange rose $0.6 to $739.40 an ounce, after hitting another 28-year high at $747.1 an ounce last week.
Bullion used to back StreetTRACKS Gold Shares, the world's largest gold exchange-traded funds, rose to a record 577.10 tonnes last week which reflected strong interest from long-term investors.
Japanese financial markets were closed for a public holiday. In other metals, platinum rose to $1,332/1,336 an ounce from $1,326.80/1,333.80 in New York. Palladium rose to $338/342 an ounce from $335/339, while silver inched up to $13.54/13.59 an ounce from $13.48/13.53.
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