Gold rose 1 per cent to above $1,100 an ounce in Europe on Thursday as the dollar slipped against the euro, boosting interest in the precious metal as an alternative asset.
Trading was thin in the run-up to the New Year holiday, with many market participants absent until Jan. 4.
Spot gold hit a high of $1,106.60 an ounce and was bid at $1,104.40 an ounce at 1209 GMT, against $1,092.55 late in New York on Wednesday.
Afshin Nabavi, head of trading at MKS Finance in Geneva, said moves in gold were being exaggerated by the thin market.
"The leaders seem to be euro/dollar and the oil price," he said, adding rising Middle East tensions could further lift crude oil and consequently gold.
U.S. gold futures for February delivery on the COMEX division of the New York Mercantile Exchange rose $13.20 to $1,105.70.
The euro jumped nearly half a per cent against the dollar on Thursday, with the U.S. currency falling broadly on year-end position adjustment. Dollar weakness makes commodities priced in the U.S. unit cheaper for holders of other currencies.
Even before these losses, the dollar index was set to end 2009 down about 4 per cent, though it had risen 3.5 per cent.
Oil prices were steady below $80 a barrel, supported by a drop in U.S. crude stocks as the cold snap fuelled demand. Gold tends to track crude prices, as the metal can be bought as a hedge against oil-led inflation.
On the wider markets, European shares turned negative as investors pared back positions ahead of the New Year break, after gains in commodity stocks and banks amid firm risk appetite helped lift them 0.2 per cent earlier on Thursday.
Gold prices have risen around a quarter this year, peaking at a record $1,226.10 an ounce in early December. They have benefited at various times from fears over financial market stability, dollar weakness and worries over inflation.
Buying of investment products such as gold exchange-traded funds has lent strong support to prices. Holdings of the world's largest gold-backed ETF, New York's SPDR Gold Trust, have risen 353 tonnes or 45 per cent in the year to Dec. 30.
Analysts say the outlook for prices in 2010 is uncertain, with much depending on the inflation and U.S. monetary policy. A rise in U.S. interest rates could lift the dollar, and consequently weigh on gold.
Precious metals house Heraeus said in a research note it sees gold prices at an average $1,175 an ounce next year.
"The upward trend, despite the recent setback, should initially stay intact," it said. "Any rally should continue to be driven by investors, and they will prefer investing in physical metal."
"A change in the overall positive attitude could happen once the low interest rates in the U.S. and Europe change," it said. "Any bigger hike here is not to be expected before 2011."
Among other precious metals, palladium rose more than 2 per cent to break through the $400 an ounce level for the first time since July 2008, with firm investment demand and gains in gold helping to lift prices.
Palladium hit a peak of $404 an ounce and was later at $399.50 versus $391, while platinum was at $1,459 versus $1,454 and silver at $16.99 versus $16.79.
Investment demand for platinum and palladium through ETFs has represented a solid source of demand this year.
Holdings of ETF Securities' London platinum-backed exchange-traded product have more than doubled this year to Dec. 29, while those of its London palladium ETP have almost quadrupled.