Gold gained on Friday, with investors keen to drive the metal to a record high of $850 an ounce as the dollar tumbled to an all-time low and oil rallied.
Investment funds were eager to buy gold, with the dollar's outlook turning weaker as expectations mounted for more interest rate cuts after a downbeat economic forecast by Federal Reserve Chairman Ben Bernanke the previous day.
The market is following the dollar and people are waiting for gold to hit $850 an ounce. Sentiment is still bullish as the market expects more cuts in U.S. interest rates and further weakness in the dollar, said Michael Blumenroth, metals trader at Deutsche Bank.
But the market is vulnerable to a correction, with some long positions established recently. Gold could fall towards $825 before bouncing again towards the highs, he said.
Gold rose to $838.90 an ounce and was quoted at $834.80/835.50 by 1526 GMT, against $832.10/832.85 in New York late on Thursday and a 28-year high of $845.40 on Wednesday. Gold was fixed at a record high of $850 on January 21, 1980.
The dollar hit a record low against the euro as fears grew that more U.S. financial firms will be hit by credit market turmoil, reinforcing expectations of further U.S. rate cuts.
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 rose above $95 a barrel, within reach of the $100 milestone, supported by tightening supply ahead of peak winter demand and the dollar's dip to new lows.
Gold has shown remarkable resiliency and price corrections continue to be shallow and short-lived, Pradeep Unni, analyst at Vision Commodities in Dubai, said.
The burgeoning problems in the U.S. economy and 'investment bull' faith have been well rewarded until now and this is adding to the confidence to be on the buy side of the markets in spite of the possibilities of a brutal crash, Unni added.
Traders said the metal's rise in past weeks had been so fast that the danger of a sharp correction was mounting.
Given that gold has gained $205 an ounce since August and most recently more than $50 in one week, one starts to wonder whether at least most recently rationality was completely abandoned by many of the buyers, Wolfgang Wrzesniok-Rossbach, head of marketing and sales at Germany's Heraeus, said.
Only after a marked dip, we would recommend industrial users to start building bigger stocks again, he said in a note.
Gold has risen more than 30 percent in three months and doubled in leas than three years.
Gold is overbought now and profit-taking pressure should grow, but funds will flow into gold because it has been performing extremely well, Tatsuo Kageyama, an analyst at Kanetsu Asset Management, said.
In other markets, the December gold contract on the U.S. futures market fell $0.9 to $836.6 an ounce on electronic trade after reaching a session high above $840.
In industry news, AngloGold Ashanti, the world's third largest gold producer, said it was given the green light by authorities to re-open parts of its TauTona mine for blasting and production after it was closed a week ago.
Platinum dropped to a one-week low of $1,435/1,440 from $1,460/1,465 an ounce in New York, palladium fell $3 to $369/373 an ounce, but silver was up at $15.51/15.56 from $15.33/15.38 in the U.S. market.
(Additional reporting by Chikafumi Hodo in Tokyo)
(Reporting by Atul Prakash; Editing by Michael Roddy)