Gold eased on Wednesday as investors took profits from its 16-month highs, but a record low dollar and bullish sentiment might lift the metal towards last year's 26-year peak, analysts said.
Spot gold rose as high as $714.00 an ounce before falling to $709.20/710.05 by 1433 GMT, against $711.90/712.50 late in New York on Tuesday, when it rose to a high of $714.20, the highest since May last year.
"A lot of gold's recent moves are dollar related, but at the same time you have got oil above $78 a barrel, Newcrest's 2.3 million oz hedge buyback and we are still rebuilding after a sell-off in August," said Tom Kendall, metals strategist at Mitsubishi Corporation in London.
"Gold is starting to perform more in its own right rather than being a source of cash and liquidity for people who were selling other assets such as equities, for example. I think it's perfectly possible for gold to hit $730 before the end of the year," he said.
Australia's Newcrest Mining Ltd bought 2.3 million ounces of gold in the last few weeks and planned to buy a further 1.7 million ounces over the next 12 months as part of its plan to exit its gold hedges. The dollar fell to a record low of 1.3890 against the euro as an expected interest rate cut next week from the US Federal Reserve continued to erode the US currency's appeal.
The dollar also fell to a fresh 15-year low against a basket of major currencies as continued problems in the credit market and weak jobs data led investors to anticipate a cut of 50 basis points in US rates. "The outlook for lower US interest rates and a weaker US dollar remain the underlying driving force for gold. Crude oil as the second fundamental factor," Dresdner Kleinwort said in a daily report.
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 oil-led inflation. Oil hit a record high of $78.99 a barrel, beating the previous record of $78.77 reached on August 1, after Opec's modest output increased failed to calm winter supply concerns.
Tatsuo Kageyama, an analyst at Kanetsu Asset Management Co Ltd, in Tokyo said investors were likely to prefer gold to stocks for a while, with the jobs report providing more proof of a slowdown in the US economy. "Now, the bulls are taking advantage. The trend has changed since the jobs report from the United States," he said.
Another support came from continued capital inflows into gold exchange traded funds. Bullion held to back StreetTRACKS Gold Shares, the world's largest gold ETF, surged to a record level of 566.95 tonnes on Tuesday. "Further upside risk remains given the positive investor sentiment which is evident from the inflows into the exchange traded funds," Barclays Capital said in a research note.
In other metals, platinum rose to $1,304 an ounce, the highest since July 27, and was last quoted at $1,296.50/1,303.50, against $1,298.50/1,305.50 in New York. Palladium was softer at $331.50/335.50 versus 333/337 an ounce, while silver inched down 8 cents to $12.58/12.62 an ounce.