We have to ask ourselves if the credit problems that we saw this summer had been remedied or not. If they haven't, we could see more bids into gold. If the credit markets are calming, then that will remove a bit (of demand) from gold, said James Steel, metal analyst at HSBC Plc in New York.
Gold, seen as a safe-haven asset and a hedge against inflation, raced to a high of $810.90, which marked the loftiest level since January 1980 when it set a record peak of $850.
It traded at $808.80/809.60 a troy ounce by New York's last quote at 2:15 p.m. EST, compared with $807.70/808.50 in late New York.
Most-active December gold on the COMEX division of the New York Mercantile Exchange settled up $2.30 at $810.80 an ounce, after hitting a high of $814.20, a contract high.
Steel said that losses in the equity markets of late have often been associated with flight-to-quality buying in gold, and that reflected the precious metal's traditional values as a safe haven.
U.S. stocks dropped on Monday as Citigroup Inc's warning of swelling loan losses fanned a sell-off in financial services companies and investors worried about the impact of the credit turmoil on the economy.
Citigroup, the biggest U.S. bank by total assets, said it could suffer an $11 billion write-down related to subprime mortgage losses. Shares tumbled to 4-1/2 year lows.
At the same time, Steel said he noted a pickup in gold sales from the scrap and recycling markets as dealers took advantage of the higher prices.
However, the recent surge in gold prices could take a toll on physical buying, Steel said.
The high prices are going to feed into the jewelry market, and already we have seen declines in Indian and Middle Eastern demand based on these high prices. And I think we are likely to see that persist, Steel said.
Global bullion demand is traditionally the strongest during the fourth quarter because of the Indian and Muslim religious festivals as well as the Christmas holiday shopping season.
SPECS BOOST SILVER
Meanwhile, silver also finished sharply higher. Spot silver was quoted at $14.64/14.69, higher than Friday's late New York quote of $14.58/14.63. London silver was fixed at $14.49.
Stephen Briggs, metals analyst at Societe Generale in London, told clients in a note that silver's recent sharp rally was largely driven by investor and speculator interest and it could not be easily sustained above $14 an ounce without further strength in gold.
Briggs added that the correlation between gold and silver prices had been 93 percent since 2005.
There is a measure of froth in the silver market, and if gold corrects as expected, then silver's fall, much as was the case in July, may be much sharper than that of gold, Briggs said.
News of strikes in gold mines in South Africa and Peru also supported bullion.
A spate of deaths in South Africa's mines, some of which are the world's deepest, has set the 300,000-strong National Union of Mineworkers and mining firms on a collision course. The union wants its members to down tools for one day in protest against what it calls genocide in the mines.
In other markets, Japanese gold futures reached a 23-year high.
Platinum fell to $1,459/1,463 from its previous finish of $1,454/1,459 an ounce in New York, while palladium eased $2 to $371/375.
(Additional reporting by Atul Prakash in London)