Gold fails to hold gains after hitting 25-year peak
9/5/2006 Sydney, Australia


LONDON, May 8 (Reuters) - Gold scaled a new 25-year high of $684.70 an ounce on Monday supported by a weak dollar and active buying by Japanese investors returning after a holiday, but failed to retain gains in later business hours.

A recovery in the U.S. currency and a drop in oil dragged down gold prices by 1.8 percent from highs as some participants decided to quit the market to pocket profits, dealers said.

But the metal was poised to rebound again after a short period of consolidation, with dealers targeting the next big level of $700 a troy ounce in the coming weeks.

"After a series of six positive sessions, some consolidation might be expected, but buying on dips remains a feature of the market and should continue to provide some support below," Julia Hamblett, vice president at Dresdner Kleinwort Wasserstein, said.

Gold (XAU=) rose as high as $684.70 an ounce before falling to $672.40/673.40 by 1424 GMT, against $682.10/683.10 late in New York on Friday. It hit an all-time high of $850 in 1980.

Pierre Lassonde, chairman of the World Gold Council, said last week he saw the gold price at $850 over the next 18 months.

The metal has gained 32 percent this year due to tension in the Middle East, firm oil prices and a volatile dollar. The price has doubled in three years.

Oil fell over $1 a barrel on hopes tension over Iran's nuclear ambition will ease after Tehran made an unprecedented move to contact Washington. Gold is often seen as a hedge against inflation.

The dollar hit fresh one-year lows against the euro, but rebounded in the afternoon trading session. The euro (EUR=) was quoted at $1.2706, compared with an intra-day high of $1.2787.

A strong U.S. currency makes dollar-priced gold costlier for holders of other currencies and lowers demand. Some investors also switch from commodities to the currency market.

"The market sentiment is cautiously optimistic still. Most people are expecting gold to trade higher, particularly as the dollar seems to be unstoppably weak at the moment," John Reade, precious metals analyst at UBS Investment Bank, said.

"I would suggest scaling back long positions in both gold and silver. Take some profits here and hope for better buying opportunities after a correction."

TOKYO MARKET STRONG

Tokyo gold futures surged to their highest since September 1985. Most-active futures rose by 57 yen to 2,491 yen per gram as sharp gains in New York futures ignited active buying by Japanese funds and retail investors.

"Although the market sentiment towards the metal remains upbeat, gold will be vulnerable to short-term corrections," said NM Rothschild in a report.

In other precious metals, platinum (XPT=) surged to a record high of $1,189/1,193 an troy ounce before easing to $1,184/1,189, against $1,178/1,183 in New York. Palladium (XPD=) rose as high as $377 a troy ounce before dropping to $369/374, compared with $370/375 in the U.S. market.

Silver (XAG=) fell to $13.52/13.62 from $13.91/14.01 in New York and a 23-year peak of $14.68 on April 20.

"It's a matter of time before the next wave of buying will come around. ETF is a dominant factor," said a dealer in Singapore, referring to an exchange-traded (ETF) silver fund that was launched in the United States two weeks ago.