Agoracom

ATUL PRAKASH

Reuters

December 31, 2007 at 8:05 AM EST

LONDON — Gold was on track for its biggest yearly gain since 1979, with prices hovering on Monday about $10 (U.S.) away from its historic highs.

The metal has jumped more than 30 per cent this year as a slide in the dollar, record high oil prices, credit market turmoil, falling U.S. interest rates and geopolitical tension helped to increase its safe-haven appeal.

In the past days, the metal gained on speculative buying driven by dollar weakness and tensions in Pakistan following the assassination of opposition leader Benazir Bhutto.

“Certainly we are looking for a test of $850 very early in 2008. All the supportive factors are still there. The dollar is very much under pressure and we have got geopolitical tensions,” said James Moore, precious metals analyst at TheBullionDesk.com.

“There is going to be some reallocation of money next year and certainly gold is going to get a favour, as a market to move 30 per cent in one direction is going to raise attention.”

Spot gold hit a 7-week high of $843.20 an ounce before falling to $834.70/835.40 by 11:17 (GMT), compared with $837.80/838.50 in New York late on Friday.

Gold was fixed at a record high of $850 in January, 1980, on high inflation linked to strong oil, Soviet intervention in Afghanistan and the effects of the Iranian revolution.

After adjusting for inflation, that level was equal to $2,079 at 2006 prices, according to industry estimates.

The latest safe-haven buying was sparked by Ms. Bhutto's killing last week, which plunged Pakistan into crisis. Electoral officials hold an emergency meeting on Monday to decide whether to go ahead with a January election that is aimed at shifting the country from military to civilian rule.

“Gold spiked to fresh highs on escalating geopolitical tensions, tightening oil supplies and a weakening dollar, which seem to stack the deck in favour of further upward movement,” said Pradeep Unni, analyst at Vision Commodities in Dubai.

“Fundamentals continue to remain positive and the dollar may extend the last week slide to this week too.”

The dollar fell as weak data fuelled speculation of more U.S. interest rate cuts while the yen benefited from jitters caused by turmoil in Pakistan and ongoing financial concerns.

A weaker dollar makes gold cheaper for holders of other currencies and often lifts bullion demand. The metal is also generally seen as a hedge against oil-led inflation.

Oil rose above $96 a barrel, heading for its biggest annual gain this decade, as dwindling stocks and growing concern over political turmoil offset the impact of a softening U.S. economy.

“For gold, this marks the sixth consecutive year of positive returns and consequently represents the longest gold price rally in history,” Deutsche Bank said in a market report.

The Tokyo Commodity Exchange was closed for a holiday.

The most-active February gold contract on the U.S. futures exchange fell $2.7 to $839.90 an ounce.

The market awaited U.S. existing home sales data at 15:00 (GMT) and jobs data later in the week for clues on the prospects for U.S. interest rate cuts and the health of the U.S. economy.

Thin trading ahead of the New Year holidays meant gold and other precious metals were prone to sharp fluctuations. Platinum dropped but held near last week's record high of $1,542.

Platinum fell to $1,528/1,532, versus $1,534/1,538 an ounce in New York and last week's record high of $1,542. Silver rose to $14.79/14.84 an ounce from $14.72/14.77 in New York, while palladium gained $1 to $364/368 an ounce.