Gold prices ended higher on Thursday but off a record peak earlier in the session as strong buying by investment funds more than offset news that central banks could be withdrawing liquidity from the financial system.
Bullion has gained nearly 40 percent year to date, driven by a combination of central bank buying, paper currency depreciation and inflation worries.
Andrew Montano, a director of Toronto-based bullion dealer ScotiaMocatta, said that investment flows into the gold market are driving prices to record highs.
"Physical gold continues to be piling up in vaults. There is a lot of metal built up in vaults owned by exchange traded funds as well as private funds," Montano said.
Spot gold was volatile, hitting a record high of $1,226.10 an ounce, before falling as low as $1,203.90. It was at $1,216.95 at 3:03 p.m. EST, versus $1,215.90 late on Wednesday.
U.S. February gold futures settled up $5.30 at $1,218.30 an ounce on the COMEX division of NYMEX.
Gold has rallied as governments flooded the system with money to jolt the economy out of recession. However, markets on Thursday are rattled by signs that central banks could be tightening money supply, traders said.
New York Federal Reserve on Thursday conducted a small reverse repurchase agreement transaction to test the cash-draining tool. Dealers said that was seen as the Fed testing the water of liquidity withdrawal.
Also, ECB President Jean-Claude Trichet laid out a package of decisions on ending and tightening up liquidity.
Late in the sessions, gold turned higher as the dollar weakened against the euro following Trichet's comments on possible exit strategies from quantitative easing.
Saxo Bank senior manager Ole Hansen said a raft of factors, including central bank buying and fears over the currency markets, were supporting gold. He said the metal was ignoring its usual technical indicators as it moves further above previous record levels.
"We are into new territory every time we make new highs," said Hansen. "It is easy to break up a percent, because there are no levels to look for as resistance."
Goldman Sachs said it sees prices at an average $1,265 an ounce in 2010, rising to $1,425 an ounce in 2011. It said low U.S. interest rates will support gold.
A poll of 33 analysts, traders and funds conducted by Reuters this week found most believe gold prices are in for a correction before the end of the year, though the precious metal's bull run is still believed to be intact.
Gold hit record highs in euro and sterling terms as well as in the dollar. Euro-priced gold reached a peak of 812.43 euros an ounce, while gold denominated in sterling hit a high of 735.28 pounds an ounce.
Among other precious metals, silver was at $19.08 an ounce against $19.20.
Spot platinum was at $1,490.50 an ounce against $1,500.50, while palladium was at $383.50 versus $387.50.
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