On December 1, in the London market, gold prices rose to a seven and half year high above $400 an ounce in Europe as fund buyers took advantage of a strong euro/dollar rate, dragging silver with it to a near four-year high above $5.50 an ounce. The euro hit a lifetime high of $1.2041 against the dollar on the day, and also rose to its highest in more than two months against the yen following the death of two Japanese diplomats in Iraq.

Spot gold had hit a high of $401.25 in the London market on December 1, a level last seen in late March 1996. That compared with $397.75/398.50 at the London market a day earlier.

Dealers said the gold market’s move higher was exacerbated by thin conditions as US players return from a long Thanksgiving weekend. ‘We have seen fund buying here in this conditions. There was some reasonable physical demand in the morning taking out any natural selling’, one dealer said.

Market attention was also directed at economic data due later including the US Institute of Supply Management’s November manufacturing index.

Investors have been attracted to gold as an alternative to the dollar, which has declined 28 per cent against the euro this year. The gold price has risen 16 per cent in dollar terms. On December 2, bullion prices peaked at $405.55 a troy ounce.

HSBC, the world’s largest gold dealer, forecast gold prices to end next year at $420 an ounce, based on a dollar value against the euro of $1.30.

Rising supplies of scrap gold in India, the world’s largest consumer have dented imports and recycling is likely to persist if prices stay high. Consumers have been selling old jewellery to encash on firm prices. Jewellers generally buy old ornaments from the users at slightly lower than prevailing prices.

Bullion prices have also been supported in recent days by Barrick Gold, the Canadian gold miner, which said it planned to eliminate forward sales.

Sales of planned gold output have been blamed for keeping gold prices low during the 1990s. The rise of gold to highs of more than seven years has coincided with a reduction in forward gold sales by producers.

Gold imports were estimated at about 100kg a day against a normal of 250-300kg at this time of the year, when people buy gold jewellery mainly to gift in marriages. India imports an average of 1.6 tons of gold a day to meet about 70 per cent of its annual consumption of more than 800 tons, which is one-fifth of global demand.

The World Gold Council’s long-awaited launch of its gold-backed security coincided with gold’s first full week above $400 a troy ounce since February 1996. Analysts are divided on whether the rise to a level rarely maintained in the past decade signals the end of the bull run for gold, since its low of $253.75 an ounce in February 2001, or whether it represents its return as a serious alternative investment.

For gold fund managers the past year has been a time to make money as more institutional and retail investors have shifted assets into gold. The gold and resources fund at Merrill Lynch, managed by Graham Birch, has seen an increased inflow in the past three months. Mr Birch and his team are estimated to have $4.5 billion under management, up from less than $1 billion in 1998.

Platinum