GOLD PRICES hit a new record above $1,040 an ounce yesterday as the dollar lost ground following reports that the US currency's critical role in global oil trading was coming under scrutiny.

Gold reached a record $1,043.45, racing past its previous peak of $1,030.80 set last March.

The catalyst was a report in the Independent newspaper in London that Gulf Arab states, along with China, Russia, Japan and France, had held secret meetings to consider using a basket of currencies to trade oil.

The report was denied by Saudi Arabia's central bank and a Kuwaiti minister said there weren't any negotiations.

Top officials from Russia, speaking on the sidelines of the IMF meeting in Istanbul, also denied the report.

Analysts were also sceptical.

"This speculation appears to have no foundation whatsoever, nor does it even make much sense, but it certainly plays well with the gold bugs" said Julian Jessop, chief international economist at Capital Economics.

"Gold has garnered strength several times this year every time the dollar's role as the world's reserve currency comes under question," said James Steel, precious metals analyst at HSBC: "If the dollar remains on the defensive, gold could maintain prices even at these high levels."

Mark O'Byrne, of Dublin bullion trader Goldcore, said the close above the previous record high today "should set us up for the anticipated rally to $1,200 an ounce".

However, he warned profit taking could see a correction and consolidation above the previous resistance at $1,020/oz.

He noted that gold remained well below record highs in euro and sterling and said it was likely to rally to new record highs in these currencies in the coming weeks. "Gold looks far from a bubble," he said, adding that it was trading at less than half its "real price" [allowing for inflation] in 1980.

However, analysts continue to warn that the long position (bets on prices rising) held by speculators remains close to record levels, leaving the market vulnerable to a correction if the dollar managed to recover.

The latest data from the Commodity Futures Trading Commission showed that the speculative net long position fell for the first time in five weeks, down 2.2 per cent to 231,386 lots in the week ending September 29th from a record 236,749 lots in the previous week.

Mr Jessop said he would not be surprised to see gold prices moved higher in coming weeks but warned that "a mix of unfounded inflation fears, conspiracy theories and speculative demand looks more like the ingredients for a speculative bubble than the grounds for a sustainable increase in prices". - (Copyright The Financial Times Limited 2009)

Originally published by CHRIS FLOOD.

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