Gold reaches 3-week high

Gold rose to a near three-week high, gaining 2 percent as an oil price rally and dollar decline spurred heavy fund buying on the first trading day of 2010.

Gold strength lifted other precious metals, with palladium climbing to its highest since July 2008, and platinum hitting a 16-month peak. Both are taking support from talk of new platinum- and palladium-backed exchange-traded funds.

"Gold was driven by allocation of new funds. The hedge funds which liquidated in December are buying back their positions to start off the new year," said Bruce Dunn, vice president of trading at New Jersey-based Auramet.

Spot gold hit a high of $1,123.40 an ounce, and was last at $1,117.85 an ounce at 3:13 p.m. EST, against $1,096.35 late in New York on Friday.

U.S. February gold futures settled up $22.10, or 2 percent, at $1,118.30 an ounce on the COMEX division of the New York Mercantile Exchange.

The dollar weakened on Monday as broad gains in stock and commodity prices encouraged investors to seek riskier, high-yielding investments at the expense of the greenback.

"Today's move is largely due to the currency markets," said Daniel Major, an analyst at RBS Global Banking & Markets.

"Throughout commodities as a whole, index rebalancing is likely to bring a fair bit of volatility in the coming days, and that volatility may be reflected in gold," he added.

The precious metal closely tracks the dollar, with weakness in the unit boosting gold's appeal as an alternative asset and making commodities cheaper for other currency holders.

Other commodities rose, with oil climbing more than 2 percent and base metals prices rising.

Analysts say the outlook for the precious metal is bright as the new year gets underway amid fears global monetary stimulus could lead to rising inflation later in 2010.

"Further upside in gold is expected, with all the uncertainty still out there," said Calyon metals analyst Robin Bhar. "Governments are still stimulating their economies and may be forced to continue doing so going into the second half."

"That (could lead) to further devaluation of paper currencies, and more importantly, it may now give rise to inflation," he added.

RECOVERY SIGNS

Some signs emerged of recovering physical demand in India, traditionally the world's largest bullion consumer.

The Bombay Bullion Association lifted its estimate of total 2009 Indian gold imports to 300-350 tonnes on Monday, from a previous estimate of a little over 200 tonnes.

Silver was at $17.47 an ounce against New York's late Friday quote of $16.84.

Platinum hit a peak of $1,519 an ounce, the highest since August 2008. It was later at $1,518 against $1,465.50, while palladium was at $418.50 an ounce against $405.50, having earlier hit a 17-month high at $420.50.

Platinum group metals prices are benefiting from hopes for an economic recovery in 2010 and speculation platinum and palladium-backed exchange traded products will shortly be launched in the United States.

ETF Securities said in a U.S. regulatory filing that a financial firm, which is also its lead market maker, has bought shares of its proposed first-ever U.S. platinum exchange-traded fund.

- Reuters