Gold climbed to a 16-week high and silver hit a six-month peak on Friday as a plummeting dollar prompted investors to strengthen their trading positions. But analysts said gold was unstable at current levels and needed to stay around $650 an ounce for some time to establish an upward trend.
"Gold is trying to break up through the $650 level at the moment. If it ends the day above $645, then we would be looking for more moves upwards next week," said a precious metals trader in London.
"You could see some profit-taking near the end of December when the funds start taking some of the profits on their positions," he added.
Spot gold rose as high as $649.50 an ounce, its highest since August 10, and was at $647.80/648.80 by 1606 GMT. It closed at $647.20/648.20 late in New York on Thursday. The dollar extended losses after a report showed US manufacturing activity contracted in November. A weaker dollar makes gold cheaper for holders of other currencies and lifts demand.
"One of the key drivers in the last few days has been the dollar weakness, which has enabled gold to move higher and strengthen," said Frederic Panizzutti, analyst at MKS Finance. "Any short-term trend reversal in the dollar might clearly result in profit-taking in gold. We have to strengthen rapidly next week and break $650 an ounce to see the upside momentum remaining intact," he added.
Firm prices encouraged miners to strengthen their positions. South Africa's Gold Fields announced completion of the acquisition of Barrick Gold's 50 percent stake in the South Deep mine, giving it operational control of the world's biggest gold deposit.
Gold rose to a 26-year high of $730 in May as funds poured money into commodities amid worries about rising oil, tensions in the Middle East and uncertainties in the dollar's outlook. It hit an all-time high of $850 in January 1980. In the physical market, Turkey's gold imports rose 19 percent in November to 13.9 tonnes from a year earlier but traders said the figure remained well below expectations.
"Metals are profiting from the current dollar weakness... And the phase of dollar weakness leading to metal strength may not be over yet," Dresdner Kleinwort said in a daily report. Goldman Sachs raised its forecast for platinum prices for next year to $1,225 an ounce from $1,100 previously and to $1,085 an ounce for 2008 from $900.
The European Central Bank said in a statement it completed sales of 23 tonnes of gold as of November 30 in line with the 2004 Central Bank Gold Agreement, under which 15 European central banks agreed to cap sales at 2,500 tonnes between 2004 and 2009. But the bank gave no further details and an ECB spokeswoman declined to comment on any future sales.
In other precious metals, silver rose as high as $14.03 an ounce and was last quoted at $14.00/14.07, compared with $13.92/13.99 in New York. But platinum fell to $1,153/1,168 an ounce from $1,175/1,180 late in New York, while palladium eased to $325/330 an ounce from $327/331.