LONDON Gold on Friday rallied through $970 (U.S.) an ounce for the first time since February in Europe as traders bought the metal as a hedge against weakness in the U.S. dollar.
Rising oil prices, reports of a pick-up in Middle Eastern demand, and firm buying in India, the world's biggest gold consumer, during the wedding season are also supporting prices, analysts said.
Spot gold was bid at $972.60 an ounce at 0923 GMT, against $958.80 an ounce late in New York on Thursday.
“Forex is really the big driver of the market,” said senior Commerzbank trader Michael Kempinski. “Oil, which is at its highest this year, is also supporting gold pretty well.”
The U.S. dollar fell towards five-month lows against a basket of currencies on Friday as hopes the worst of the downturn has passed dented safe-haven buying of the unit, and amid worries over U.S. government debt levels.
Its slip prompted investors to take refuge in gold, pushing prices up to three-month highs.
“In the near term, the dominant theme behind moves in gold appears to be moves in the U.S. dollar rather than inflation expectations – which declined yesterday after a recovery in the U.S. bond market,” said UBS analyst John Reade in a note.
“But a combination of a weaker dollar and rising inflation expectations would represent the perfect storm for gold,” he added.
Oil prices, often seen as a key indicator of rising inflation, rallied to fresh six-month highs on Friday and are on track for their largest monthly percentage gain in more than ten years.
Silver prices tracked gold higher to a near ten-month peak of $15.54 an ounce, the metal's strongest level since August 8.
Prices are benefiting from strong investment demand for the metal, with buying of silver-backed exchange-traded funds soaring since the beginning of 2009 and speculative net long positions on the COMEX futures exchange rising.
While industrial and photographic demand for the metal is lacklustre, investors are buying the metal as a cheap proxy for gold. It too is being seen as a good portfolio diversifier to hedge against dollar weakness and inflation.
“This trend (for rising prices) is likely to persist as we head into the summer months and more `green shoots' offer additional support to silver's appeal as an industrial metal as well,” said VTB Capital in a note.
Among other precious metals, platinum was quoted at $1,162.50 an ounce against $1,139.50, having earlier touched a three-week high of $1,164, while palladium was at $234 against $234.
ETF Securities said holdings of its platinum and palladium exchange-traded funds rose on Thursday, by just under 6,000 ounces and around 5,000 ounces respectively.
Holdings of its three gold-backed ETFs also ticked up nearly 11,000 ounces to 7.477 million ounces, it added.