Spot gold prices soared above $510 an ounce on Tuesday, their highest since January 1980, buoyed by continued fund buying on inflation worries and increased diversification into commodities, dealers said.
However, profit taking and selling interest above $510 pushed the bullion market back to the previous day's closing level. Spot gold briefly hit $510.30/511.25 an ounce before easing to $507.90/508.70, down from $508.40/509.20 last quoted in New York on Monday.
In January 1980, gold hit a record $850. "We saw some good Japanese buying mainly related to Tokyo futures," said a bullion dealer in Hong Kong. He said Japanese investors were doing arbitrage selling Tokyo Commodity Exchange (TOCOM) gold futures and at the same time buying spot bullion.
In the short term, gold was expected to trade between $505 and $512, with major support seen between $502 and $498, he said, adding that if gold were to exceed $512, it could surge to $520-$530.
"The market is very much driven by funds and investors," said a bullion dealer in Singapore. "I don't think it's dependent on the physical side anymore because the spread between physical gold and paper gold in Singapore is apparently quite compressed.
So there is no big physical buying going on." Gold, used in jewellery and as an investment, spent much of the period from 1997 to 2001 below $300, before embarking on a Bull Run that has seen its price nearly double.
Despite a stronger dollar, dealers said inflation fears have played a key role in gold's rise, especially over the past year. Robust investment and jewellery demand as well as a stable level of global mine production have been supportive.
TOCOM gold futures extended their gains on Tuesday to set a new 15-year high on the yen's weaker tone against the dollar, with the benchmark October 2006 future ending up 13 yen ($0.107) per gram at 2,002 yen.
The benchmark contract at one point jumped to $2,020 yen, the highest since August 1990. Dealers said the spot bullion market has been supported by strong buying interest in Japan in recent weeks.
A firmer dollar usually has the effect of raising the value of yen-based commodity prices, while it makes dollar-based gold less attractive to investors with other currencies.
However, the prospect of the yen's further decline versus the dollar and inflation worries prompted investors in Japan, one of the world's top importers, to scramble to buy gold, dealers said.
Another Hong Kong dealer said gold was also supported by expectations that some Asian central banks would increase the amount of gold in their reserves to reduce their heavy exposure to the US dollar.
He said the central banks included those of Singapore, India and China, which have very small gold reserves compared with central banks in Europe and elsewhere.
In November, Russia, Argentina and South Africa decided to increase the amount of gold in their reserves, reversing a six-year trend of central bank sales, mainly from Europe. Dealers said gold had plenty of room to rise into 2006, but there were concerns about the potential for fund liquidation due to big speculative long positions.
Net long exposure eased in the latest weekly Commitments of Traders data from the Commodity Futures Trading Commission. The report showed the net speculative long position in Comex gold declined to 158,905 contracts on November 29, from 162,982 lots on November 22. Other precious metals, except platinum, followed gold's lead. Platinum eased to $994/998 an ounce from $999/1,003 late in New York. On Monday, platinum rose to $1,006, the highest since March 1980.
Sister metal palladium rose to $272.5/276.5 an ounce from $270/274. In trade, the metal rose to $273, the highest since April 2004. Silver inched up to $8.64/8.67 an ounce from $8.63/8.65 late in New York. Silver hit $8.68/8.71, its highest since August 1987.