Gold surged to a record high above $1,040 per ounce on Tuesday, with buying fueled by dollar weakness after a report, later denied, that Gulf Arab states were considering abandoning the U.S. currency for oil trade.
Both spot gold prices and U.S. gold futures have benefited from a convergence of factors including the dollar's decline, technical buying momentum and worries about potential inflation as central banks struggle to emerge from unprecedented fiscal stimulus measures.
In an environment where interest rates are virtually zero, the incremental cost of moving into gold is nil. It stands to reason for investors that gold is more desirable, said Jack Ablin, chief investment officer at Harris private bank in Chicago.
Spot gold hit a historic $1,042.55 per ounce and was last up 2.2 percent at $1,038.80, compared with $1,016.65 quoted late in New York on Monday.
U.S. gold futures hit a record high, while the metal also hit six-month highs when priced in sterling and euros, breaking above 700 euros an ounce for the first time since early April.
A positive technical picture for gold fueled buying on the fund side, traders said. However, the weight of near-record long positions in New York gold futures still leaves the market vulnerable to a correction.
The dollar slipped sharply after UK newspaper the Independent said Gulf Arab states were in secret discussions to end the use of dollars in oil trading.
Peter Fertig, a consultant at Quantitative Commodity Research, said the final quarter was typically strong for gold, due to rising jewelry demand -- a weaker than usual factor this year -- and as the dollar is seasonally soft.
That is the major driver of investment demand, he said.
The speculation, even if it has been denied, that Gulf states would like to peg oil prices to a currency basket and not the U.S. dollar alone has been a positive factor for gold, while weakening the dollar against other major currencies.
Among other commodities, oil and base metals climbed on the back of the U.S. currency weakness, which makes dollar-priced assets cheaper for holders of other currencies. Strength in other commodities is often reflected in gold.
Physical demand for the metal also trickled through. The largest gold exchange-traded fund, New York's SPDR Gold Trust, said its holdings rose 1.5 tonnes on Monday.
Traders said they were also seeing rising demand in India, the largest consumer of gold last year, ahead of the Diwali festival on October 19.
Mark Cutifani, chief executive of AngloGold Ashanti
The yellow metal's gains helped lift silver to a near two-week high of $17.25 an ounce as investors bought it as a cheaper proxy for gold. Silver was later at $17.11 an ounce against $16.59.
Platinum, the precious metal widely used in autocatalyst manufacturing, also benefited from gold's climb, as well as the better appetite for risk demonstrated by rising equity markets.
Platinum was at $1,312 an ounce against $1,293 while palladium was at $301 against $298.50.
(Additional reporting by Veronica Brown in London and Frank Tang in New York; editing by James Jukwey)