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Gold turned higher Tuesday despite a slightly higher U.S. dollar, as the metal remains firmly underpinned by investment demand based on the prospect of rising inflation and more gold acquisitions by the official sector.

Gold prices have risen 12 per cent since the beginning of November, when reports emerged that India's central bank had bought 200 tonnes of gold from the IMF. Russia, Sri Lanka and Mauritius have all since also announced gold acquisitions.

"If central banks buying gold are diversifying their reserves back from the U.S. dollar to gold or other assets, that is a sign that [investors]should stay long gold and short the dollar," said Deutsche Bank trader Michael Blumenroth.

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"As long as the market is thinking there is inflation to be expected next year...central banks are buyers rather than sellers, and there is fresh investment money flowing into the market, there is no way you want to sell gold," he added.

Spot gold was at $1,167.50 (U.S.) an ounce at 3:23 p.m. ET, having risen as high as $1,171.10 in earlier trade, against $1,165.85 late in New York on Monday - when bullion hit a record high of $1,173.50 an ounce.

U.S. December gold futures settled up $1.10 at $1,165.80 an ounce on the Comex division of the New York Mercantile Exchange.

The dollar initially fell against a currency basket on Tuesday after preliminary data showed the U.S. economy grew at a slower pace in the third quarter than previously thought, but it later recovered to trade a shade higher.

Its recovery has pressured gold from its earlier highs. A near 2 per cent drop in oil prices to nearly $76 a barrel ahead of U.S. stocks data later in the session also weighed.

Options-related buying also boosted the U.S. gold market. Open interest in Comex gold futures rose sharply after December gold options' expiration on Monday, dealers said.

Analysts are confident fresh investment interest in gold will lift it once more.

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"Definitely prices could still go higher - $1,200 is within reach, and there is no reason why it should not be reached this calendar year," said Peter Fertig, a consultant at Quantitative Commodity Research.

Gold's correction from record highs in earlier trade led to a pick-up in wholesale demand for the metal in major bullion consumer India, traders said.

Analysts and fund managers say that in addition to dollar weakness, inflation prospects in 2010 and more official sector buying are set to support prices.

However, Mark Johnson, portfolio manager of the $1.6-billion USAA Precious Metals and Minerals Fund, said that gold could retreat 10 to 15 per cent in the near term before recovering due to a resurgent dollar in overbought market conditions.

The world's largest gold-backed exchange-traded fund, the SPDR Gold Trust, said its holdings stood at 1,121.457 tonnes as of Nov. 23, up 3.964 tonnes from the previous business day and their highest since late June.

Silver was at $18.52 an ounce against $18.59, platinum at $1,446.50 an ounce against $1,454.50, and palladium at $369.75 an ounce against $369.

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