Gold hits 16-month high

LONDON (Reuters) - Gold hit a new peak on Wednesday and is poised to scale 28-year highs on safe-haven buying and a sharp drop in the dollar after the U.S. Federal Reserve slashed interest rates.

Other precious metals also firmed, with platinum rising to its highest in nearly eight weeks, silver hitting a six-week peak and palladium touching its best level in almost a week.

Spot gold touched $726 an ounce, its loftiest level since May 2006, before easing to $723.00/723.80 by 10:10 a.m., against Tuesday's late New York levels of $719.30/720.30.

"The rate cut reflects pretty well the concerns in the market, especially in terms of liquidity. We might see another wave of buying in gold on the back of a weaker dollar and also on the willingness in the market to get most ideally possible positions," Frederic Panizzutti, analyst at MKS Finance, said.

"Gold should again play its full and entire role as a safe haven asset against other potentially falling assets. $730 is definitely a very short term target, but we believe there is further potential beyond $730 in the short- to medium-term."

Bullish sentiment lifted U.S. gold futures to a 28-year high on Tuesday, with the December gold contract on the Globex electronic platform used by the New York Mercantile Exchange and its COMEX metals division rising to a high of $735.50 an ounce.

Spot gold hit a 26-year peak of $730 in mid-May last year. A rise above that level would take bullion to its highest since January 1980, when it hit an all-time high of $850 an ounce.

The dollar fell to a 15-year low against a basket of currencies but later rose as investors bet the Fed's interest rate cut will help boost a slowing U.S. economy.

A weaker U.S. currency makes dollar-priced gold cheaper for holders of other currencies and boosts the metal's appeal as an alternative investment. Gold is also seen as a hedge against oil-led inflation.

POSITIVE FACTORS

Oil rose above $82 a barrel, closing in on a record hit the previous day after the interest rate cut and raised expectations of still robust energy demand in the world's top consumer.

"There are a couple of things. The dollar is certainly one of them and oil is helping too. There is no doubt, based on the client flows that we are seeing, that some risk aversion or safe-haven buying of gold is going on," said John Reade, head of metals strategy at UBS Investment Bank.

Yukuji Sonoda, a metals analyst at Daiichi Commodities in Tokyo said fundamentals for gold looked strong after Australia's Newcrest Mining Ltd (NCM.AX) said it was raising money to close out its hedge book. Growth in gold exchange-traded funds also showed no sign of slowing down.

Bullion used to back StreetTRACKS gold shares GLD.N, the world's largest gold ETF, was at a record 575.57 tonnes as of Wednesday, latest data showed.

"You can throw away your charts in these kind of market conditions. There's a chance we will see a new high this week," a bullion dealer in Singapore said.

The metal has risen in other currencies too, generally a bullish sign. Gold quoted in euros was near a 7-month high of 520.45 euros hit on Tuesday, while in pounds it was just below previous day's 14-month high of 362.17 sterling

Platinum rose to $1,309 an ounce, its best level since July 27, before easing to $1,307/1,312, against $1,301.20/1,308.30 in New York.

Silver rose as high as $13.08 before falling to $12.98/13.03, versus $12.96/13.01 and palladium rose to $332/337 an ounce, its highest since September 13, from $329/333 late in New York.

(Additional reporting by Lewa Pardomuan in Singapore)