LONDON (Reuters) - Gold jumped to a new three-month high above $975 on Friday as traders bought the metal as a hedge against weakness in the dollar, which fell to five-month lows against a basket of currencies.
Rising oil prices, reports of a pick-up in Middle Eastern demand, and firm buying in India, the world's biggest gold consumer, during the wedding season are also supporting prices, analysts said.
Gold touched a peak of $978.30 and was at $974.90 an ounce at 9:32 a.m. EDT, from $958.80 an ounce late on Thursday. U.S. gold futures for June delivery on the COMEX division of the New York Mercantile Exchange rose $13.50 to $975 an ounce.
"If the dollar continues to be sold, the first obvious target is $1,006 an ounce, which is the peak we had in February this year," said Tom Kendall, precious metals strategist with Mitsubishi Corp.
"That is feasible over the next week or so, if that trend in the dollar continues."
The U.S. currency extended losses against the euro and yen after GDP data showed the U.S. economy contracted by less than initially estimated in the first quarter.
The dollar <.DXY) hit five-month lows against a basket of currencies amid fears over the impact of aggressive stimulus spending on U.S. government debt.
Its slide has prompted investors to take refuge in gold, pushing prices up to three-month highs.
"In the near term, the dominant theme behind moves in gold appears to be moves in the U.S. dollar rather than inflation expectations - which declined yesterday after a recovery in the U.S. bond market," said UBS analyst John Reade in a note.
"But a combination of a weaker dollar and rising inflation expectations would represent the perfect storm for gold."
In Milan, the World Gold Council's investment research manager Rosanna Wozniak told Reuters she expected global investment demand to remain firm throughout the year, though jewelry and industrial usage would drop.
INVESTMENT DEMAND
Silver prices tracked gold higher to a near 10-month peak of $15.56 an ounce, the metal's strongest level since August 8. They were later at $15.43 an ounce against $15.12.
Prices are benefiting from strong investment demand for the metal, with buying of silver-backed exchange-traded funds soaring since the beginning of 2009 and speculative net long positions on the COMEX futures exchange rising.
While industrial and photographic demand for the metal is lackluster, investors are buying the metal as a cheap proxy for gold. It too is being seen as a good portfolio diversifier to hedge against dollar weakness and inflation.
"This trend (for rising prices) is likely to persist as we head into the summer months and more "green shoots' offer additional support to silver's appeal as an industrial metal as well," said VTB Capital in a note.
Elsewhere, platinum was at $1,173 an ounce against $1,139.50, having earlier touched a near five-week high of $1,178.50, while palladium was at $234 against $225.
ETF Securities said holdings of its platinum (PHPT.L: Quote, Profile, Research, Stock Buzz) and palladium (PHPD.L: Quote, Profile, Research, Stock Buzz) exchange-traded funds rose on Thursday, by just under 6,000 ounces and around 5,000 ounces respectively.
Holdings of its three gold-backed ETFs also ticked up nearly 11,000 ounces to 7.477 million ounces, it added.
