Gold surged nearly 2 percent to a record high near $1,375 an ounce Wednesday, boosted by worries over dollar depreciation after the Federal Reserve signaled it will start buying government debt again to stimulate the economy.
Gold prices have rallied 25 percent so far this year as investors sought safe havens while the Fed and other central banks profess readiness to inject more money into the financial system.
Silver hit a 30-year peak to approach $24 an ounce, and the Reuters/Jefferies CRB index, a barometer for commodities, rose above 300 points for the first time in two years, as the dollar fell broadly on reinforced expectations of more U.S. easing.
Axel Merk, portfolio manager of the Merk Hard Currency Fund, said that the Fed and other central banks are trying to weaken their currencies to boost economic growth, prompting investors to turn to gold as an alternative currency.
"With the weaker dollar, inflation will pick up in the commodity space, which is the most sensitive to monetary stimulus. So, it's only logical that gold will do very well in that environment," said Merk, who manages $500 million in mutual fund assets.
Spot gold hit an all-time high of $1,374.15 an ounce and was up 1.6 percent at $1,371.05 an ounce at 12:25 p.m. EDT (1625 GMT). U.S. December gold futures rose $25.80 to $1,372.50.
Silver hit $23.94, its strongest level since 1980, and was last up 2.8 percent at $23.93 an ounce.
The dollar remained a main short-term driver of gold, with the currency coming under selling pressure as market expectations grew that further Fed easing was imminent.
"Because we are in a world of quantitative easing in the developed economies, and as QE is almost synonymous with competitive devaluation ... gold and the precious metals (are) taking on the function of an alternative currency," said Ashok Shah, chief investment officer at London and Capital.
"As we go into the next 1-4 quarters, the role of precious metals as alternative currency will become much more paramount," he said. "The role of gold as an inflation hedge is not important now, but it may become important in the next cycle when the time to reverse quantitative easing comes."
The correlation between gold and the U.S. dollar was near a negative 0.6, its most pronounced in six months on a 25-day rolling basis, Reuters data showed.
ASIAN DEMAND UP
Asian dealers said physical demand remains strong, and scrap selling is scarce, as market players bet on a further rally in prices.
Edel Tully, precious metals strategist at UBS, said the bank's physical sales to India were above the year-to-date average ahead of Diwali, a key period for Indian gold buying.
Meanwhile, spot palladium rose as much as 2.5 percent to a one-week high of $594.50 an ounce, aided by the weaker dollar and evidence that investors are continuing to buy into one of the top performing commodities of 2010.
Outstanding shares in ETF Securities' U.S.-listed palladium exchange-traded fund, the world's largest palladium ETF, staged their largest one-day rise in six months on Tuesday, indicating strong inflows of the metal.
With palladium up 45 percent so far this year and close to its highest in over nine years, the platinum-palladium ratio, or the number of ounces of palladium used to buy an ounce of platinum, fell to 2.87, its lowest in more than six years.
Palladium was up 1.4 percent to $587.93 an ounce, and platinum gained 1.3 percent to $1,696.50 an ounce.
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