Gold firmed on Thursday and held within sight of its 16-month high of $726 an ounce, but the metal was seen trading in a tight range before challenging its highest level in nearly three decades.

Spot gold rose to $723.50/724.20 an ounce on firm oil from $721.10/721.90 in late New York. Gold hit a 16-month high of $726 on Wednesday on the back of a weaker U.S. dollar, which tumbled after the Federal Reserve surprised markets with a hefty half-point rate cut.

Gold scaled a 26-year peak of $730 in May 2006. Dealers expect gold to push beyond that level because of the bullish sentiment, taking it to its highest level since January 1980, when the metal hit an all-time high of $850 an ounce.

Obviously, we will be finding some support from safe-haven buying that's going on from a high oil price, said Darren Heathcote of Investec Australia. I think we are still waiting for the dust to settle before people determine its future.

Gold is likely to trade in a range of $720 to $727, while waiting for more news on the state of the U.S. economy, including a testimony from Fed Chairman Ben Bernanke on Thursday, he said.

I can't really see anything at this present juncture which will call it to break out of that pattern, said Heathcote.

Chief Executive Greg Wilkins of Barrick Gold Corp, the world's biggest gold producer, said on Wednesday that current U.S. conditions of low interest rates and potential inflationary pressures were a perfect storm for gold prices.

Tokyo gold futures shrugged off gains in New York's COMEX market and dropped on the back of profit taking. Benchmark gold futures on the Tokyo Commodity Exchange for August ended 10 yen per gram lower at 2,719 yen.

The contract rallied to 2,730 yen a gram on Wednesday -- its highest since September 1985 -- as cash gold hit highs.

The most-active December gold contract on the COMEX division of the New York Mercantile Exchange rose $1.6 to $731.1 an ounce in electronic trade on Thursday -- within sight of a 28-year high of $735.50 it hit on Tuesday.

I guess $730 will be a crucial level to watch, but I think the market has to consolidate at the moment. I am pretty conservative about the trading range today, so I think gold will move in the $722 to $724 range, said a dealer in Hong Kong.

There's some sort of profit taking in Japan. But local investors are still expecting the dollar to rise against the yen, which will be supportive for TOCOM, he said.

The dollar hardly moved against the yen at 115.90 yen, while the euro vaulted above the psychologically key $1.40 to the dollar, striking an all-time high as investors kept dumping the U.S. currency after the Fed's interest rate cut.

Investors await a testimony from Fed Chairman Ben Bernanke on problems in the subprime mortgage sector before a congressional committee from 1400 GMT.

NYMEX crude for October delivery held near $82 a barrel, aided by a bigger than expected drawdown in U.S. crude inventories, after hitting an all-time intraday high of $82.51 on Wednesday.

Trading in the physical sector slowed to a trickle as jewelers and speculators waited for the bullion to stabilize. Prices of gold bars in Singapore hovered close to the spot London price.

People are running away. They just don't know what to do. You won't sell now because there may be a chance for the price to go to $730, said a dealer in Singapore.

If you buy now but then the price doesn't go beyond $725, then you won't make much profit when you cash in, he said.

(Additional reporting by Miho Yoshikawa)

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