Gold rallied to a seven-week high on Monday and close to a record high of $850 on speculative buying driven by a weak US dollar and tensions in Pakistan following the assassination of opposition leader Benazir Bhutto.
Gold has risen more than 30 percent this year - the biggest annual gain since 1979 - as a number of factors, including a weak US dollar, record-high crude prices, credit market turmoil and falling US rates, boosted its safe-haven appeal.
"There's still a potential for further unrest in Pakistan following Bhutto's assassination. I guess there's a potential for us to push higher and test the highs around $847 at least," said Darren Heathcote of Investec Australia in Sydney.
"I think $847 will be the initial technical point to breach. When London comes in, more stops get taken out," he said. Spot gold hit an intraday high of $843.20 an ounce before dipping to $842.60/843.40. This was still higher than $837.80/838.50 late in New York on Friday.
Gold hit a record high at $850 January 1980 on high inflation linked to high oil prices, Soviet intervention in Afghanistan and the effects of the Iranian revolution. After adjusting for inflation, that level was equal to $2,079 at 2006 prices.
The latest safe-haven buying was sparked by Bhutto's killing last week, which plunged Pakistan into crisis. Electoral officials hold an emergency meeting on Monday to decide whether to go ahead with a January election that is aimed at shifting the country from military to civilian rule.
Bhutto's killing in a suicide attack on Thursday triggered bloodshed across the country and rage against President Pervez Musharraf, casting doubts on nuclear-armed Pakistan's stability and its transition to civilian rule.
"I think it's possible to touch $850 in the near term. It moved in a massive range already in the past 24 hours," said David Moore, a commodity analyst at the Commonwealth Bank of Australia in Sydney.
"It's possible it might go higher in the near term. It's obviously been supported by a number factors but probably the thin trading conditions are sort of exacerbating the movements in the gold price at the moment," he said.
Thin trading in Asia ahead of the New Year holidays meant gold and other precious metals were prone to sharp fluctuations. Platinum dropped but held near last week's record high of $1,542 an ounce.
"It will probably try $845-$850 later on in low volume as long as the dollar remains weak against the yen and the euro," said Peter Tse, a dealer at Scotia Mocatta in Hong Kong.
"The key is no-one dares to get short ahead of the holiday," said Tse, adding that gold's direction after the New Year break would still be determined by movements in currencies.
The dollar was under pressure Monday as expectations of more US interest rate cuts enhanced the euro's yield advantage, while the yen benefited from a reluctance to hold risky positions over the holidays. The euro rose to $1.4736 from $1.4714 late in New York on Friday and just off a two-week high of $1.4747. The dollar also dipped to 111.97 yen from 112.63 late on Friday.
Crude oil rose above $96 a barrel on political instability in Pakistan and growing tensions between Iran and the United States over Tehran's nuclear ambitions. The Tokyo Commodity Exchange was closed for a holiday. The benchmark December 2008 gold futures on the Tokyo Commodity Exchange ended 8 yen per gram higher at 3,060 yen on Friday. The most-active February gold contract on the COMEX division of the New York Mercantile Exchange added $3.6 to $846.3 an ounce in electronic trade.
Platinum fell to $1,531/1,536 an ounce from $1,534/1,538 late in New York. The metal hit a record high of $1,542 last week on supply concerns following deadly mining accidents in South Africa, the world's main producer. Silver rose to $14.88/14.93 an ounce from $14.72/14.77 late in New York. Palladium gained to $364/368 an ounce from $363/366 an ounce.