Gold rises towards $1,120/oz on strong sentiment

NEW YORK/LONDON (Reuters) - Gold hit record highs near $1,120 an ounce Wednesday, stirred by renewed buying interest by central banks, and bullion should benefit from expectations that an erratic economic recovery will keep U.S. interest rates low.

The metal is now poised for more gains, analysts said, with the weak dollar helping gold build on a rally that began last week after the IMF sold 200 tons of bullion to India's central bank, raising the prospect of more official sector buying.

Joseph Foster, manager of Van Eck International Investors Gold Fund, said that the gold market is currently being driven by worries about paper currency depreciation and potential inflation.

"Firming commodities prices and the liquidity being created by current monetary policies could eventually bring much higher levels of inflation," said Foster, who manages more than $800 million mutual fund assets.

Spot gold hit a high of $1,118.35 an ounce earlier in the session. Bullion was at $1,116.95 an ounce at 2:29 p.m. EST (1929 GMT), versus $1,105.30 late on Tuesday.

U.S. December gold settled up $12.10, or 1.1 percent, at $1,114.60 an ounce on the COMEX division of the NYMEX.

The dollar index initially fell a quarter of a percent to a 15-month low and the euro rose to a two-week peak within sight of last month's 2009 high of just over $1.5060. <FRX/>

Gold held gains in spite of the dollar's bounce in the late sessions.

Analysts said the dollar was smarting after Fed officials said on Tuesday that high unemployment and sluggish consumer spending were risks to recovery in the U.S. economy, which may keep the Fed funds rate low.

Weakness in the unit boosts gold's appeal as an alternative asset and makes dollar-priced commodities cheaper for holders of other currencies.

Gold prices also rose in nondollar terms. Euro-denominated gold reached its highest level since March at 746.37 euros.

BARRICK SEES RECORD MARGINS

Barrick Gold Corp (ABX.TO), the world's biggest gold producer, told Reuters it sees the potential for record margins in the fourth quarter as gold prices hit new peaks and costs are stable or lower.

In major gold producer South Africa, the country's biggest union said it had received the go-ahead from authorities for its workers to strike at Gold Fields (GFIJ.J) over a disputed recruitment assessment method.

Vietnam's central bank said it will allow imports of gold -- banned since May of last year -- after bullion prices rose sharply in recent days, potentially opening up a new source of demand.

But with the prospect of persistent dollar weakness boosting fund interest in gold and further central bank purchases seen as a distinct possibility, the outlook for gold prices is positive.

U.S. investment bank Goldman Sachs said on Tuesday gold could rise to record highs in a range from $1,150 to $1,200 an ounce, driven by falling real interest rates and renewed buying interest by central banks.

Among other precious metals, spot silver was at $17.54 an ounce against the previous session's late quote of $17.32 in New York, tracking gold higher, while platinum was at $1,363.50 an ounce against $1,349.50.

Palladium was at $342.00 against a late Tuesday New York quote of $331.50. Earlier it touched $346.75 an ounce, the highest level since August 2008, on fund buying and strong Chinese car sales data.

(Additional reporting by Pratima Desai and Humeyra Pamuk in London; editing by Jim Marshall)