U.S. gold futures rose early on Wednesday on strong follow-through buying and inflationary worries, extending gains from Tuesday when gold contracts surged to a 28-year high after the Federal Reserve half-percentage point rate cut.

Meanwhile, the tonnage growth in bullion exchange-traded funds (ETFs) showed no signs of slowing down. Bullion used to back No. 1 StreetTRACKS Gold Shares surged to a record 575.6 tonnes, data showed.

There is some strong buying all around here, just follow-through from last night. We came off from the highs but still good buying and some hedge fund buying coming in here, Joseph Guzzardi of Sabin Commodities said from the COMEX floor in New York.

At 10:42 a.m. EDT (1442 GMT), most-active December gold on the COMEX division of the New York Mercantile Exchange was up $5.60 at $729.30 an ounce, dealing between $727.70 and $735.

It does look to me like we are going to go higher. It's the day of cheap money again. The Fed dropped rate by more than people thought, said Leonard Kaplan, president of Prospector Asset Management in Evanston, Illinois.

Shortly after the Fed's announcement on Tuesday, the December contract in electronic trading rallied to a high of $735.50, the loftiest level since gold was trading above $800 in January 1980. Gains accelerated when the benchmark contract exceeded the May 2006 high of $732.

Analysts said that the Fed's aggressive rate cut could have inflationary implications to the economy, especially when crude has been hitting record highs this week.

Gold is usually seen as a hedge against inflation.

Kaplan said that inflationary pressure should boost gold given the record prices in oil, wheat and copper. Reuters/Jefferies CRB Index rose to a one-year high in early trade on Wednesday.

The bond market has been sharply lower. I'm trying to figure out if it's just the movement of funds away from safe-haven buying in the bonds into the precious metals, or whether the bond investors are thinking about inflation, Kaplan said.

U.S. Treasury debt prices slid sharply on Wednesday, led by long-dated bonds, due to inflation worries and demand for riskier assets such as stocks after the Federal Reserve's aggressive rate cut.

The benchmark 10-year note's price slipped 23/32 for a yield of 4.56 percent, compared with 4.47 percent late on Tuesday. Bond yields and prices move inversely.

The dollar rose from a 15-year low against a basket of currencies on Wednesday as investors bet the Federal Reserve's interest rate cut on Tuesday will help boost a slowing U.S. economy.

In industry news, Harmony Gold, the world's fifth-biggest gold producer, is talking to banks in South Africa about raising debt to fund its new mine in Papua New Guinea, the firm said on Wednesday.

Spot gold was quoted at $721.40/722.10, compared with the $719.30/720.30 an ounce late Tuesday. The London morning gold fix was set at $723.75.

Spot gold is not far from its 26-year high of $730 an ounce struck in May last year and is roughly $138 below its all-time high of $850, fixed in London on January 21, 1980.

COMEX December silver was up 19 cents or 1.5 percent at $13.115 an ounce, trading between $13.03 and $13.24.

Spot silver traded at $12.96/13.01 an ounce, essentially flat compared with its previous finish late Tuesday. London silver was fixed at $12.995 per ounce.

NYMEX October platinum gained $3.30 to $1,310 an ounce. Spot platinum was quoted at $1,307/1,312.

December palladium edged down 10 cents to $335.60 an ounce. Spot palladium was at $332/337.