Gold soars to record high above key $850/oz level

By Atul Prakash and Veronica Brown

LONDON (Reuters) - Gold prices swept to a record high on Wednesday above the key $850-an-ounce mark, driven by surging oil, a weaker dollar and simmering geopolitical tensions that polished its safe-haven credentials.

Other metals jumped on bullion's bandwagon, with platinum scoring a record high, silver at its highest since mid November and palladium at two-month highs.

Spot gold surged to a record $861.10 an ounce -- surpassing the $850 fixing high of January 1980.

It later backtracked slightly to $855.70/$856.50 in New York at 2:25 p.m. EST (1925 GMT), compared with $832.70/833.50 quoted late in New York on Monday.

Most-active gold futures for February delivery GCG8 settled up $22, or 2.6 percent, at $860 an ounce on the COMEX metals division of the New York Mercantile Exchange, after surging to $864.90, a contract high.

"It's not surprising, given that gold's a safe-haven asset. It's reflective of the fact there is risk aversion in the market in the new year," said Phylis Papadavid, strategist at Socgen. "Right now the market is wanting more clarity on the U.S. economy."

The euro extended gains against the dollar on Wednesday after a gauge of the U.S. manufacturing sector last month dropped to its lowest since April 2003, increasing expectations for more Federal Reserve rate cuts and proving a final catalyst for gold's latest move higher.

A weaker dollar makes gold cheaper for holders of other currencies and often lifts bullion demand. The metal is also generally seen as a hedge against oil-led inflation.

Oil prices briefly touched a record $100 a barrel on Wednesday, boosting gold's appeal as a hedge against inflation. Violence in Nigeria, tight energy stockpiles and a weaker dollar triggered a surge of speculative buying in crude oil. U.S. crude futures settled up $3.64 at $99.62 a barrel.

"$100 is just the beginning ... This is kicking off what you are going to see this year. There will be huge moves up in gold, and huge moves up in crude," said Zachary Oxman, senior trader with Wisdom Financial in Newport Beach, California.

Gold was also boosted as a safe-haven investment as U.S. stocks dropped 2 percent after manufacturing data showed signs of contraction, raising the possibility of a recession in 2008.

"What gold is showing by going to a new high is that gold acts as an economic fever thermometer, and it is clearly indicating that there is more financial trouble on the horizon," said Greg Orrell, portfolio manager overseeing $150 million assets at OCM Gold Fund in Livermore, California.

Gold gained more than 30 percent in 2007, its biggest annual gain since 1979. The metal's allure as an investment gathered momentum as the dollar tumbled to successive record lows and financial markets reeled from a global credit crunch.

Bullion has also benefited from a vogue for commodities in recent years, felled by booming emerging market growth fostered mainly by China's industrial revolution.

Geopolitical tension -- most recently highlighted by the assassination of Pakistan opposition leader Benazir Bhutto -- also proved a boon for safe-haven buying.