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Gold stays high as Middle East violence props oil

NEW YORK (Reuters) - Gold maintained its strength on Monday, tracking a climb in crude oil prices amid renewed tensions in the Middle East, but it retreated from early highs as oil prices gave up some ground.

Broad weakness in the dollar also supported gold. A slide in the pound sterling to a record low versus the euro helped take the precious metal to a new all-time high when priced in British pounds, according to Reuters data.

Spot gold reached a session high of $889.55 an ounce, its strongest level since October 10, but was off the highs at $877.55/880.55, up from $866.80 late in New York on Friday.

In sterling terms, gold hit an all-time high of 605.07 pounds an ounce, up from 592.40 pounds on Friday. U.S. gold futures for February delivery climbed $4.10 to $875.30.

“The dollar and crude directed the market, with early strength in crude and the weak dollar pushing the market up hard early, along with the events in Gaza Strip,” said Stephen Platt, an analyst at Archer Financials in Chicago.

Later in the session, some players used price gains as a profit-taking opportunity, once oil trimmed its gains.

“We backed off those highs in recognition that that situation has not changed. And crude backed off its highs and the dollar rallied up from its lows, which led to some profit taking from that early strength,” said Platt.

Israeli aircraft destroyed a bastion of Hamas rule over Gaza on Monday, the third day of an offensive that has killed more than 300 Palestinians in the deadliest violence in the territory.

“Gold is reflecting geopolitical tensions. The other precious metals are tracking gold at the moment, and the oil market,” said Deutsche Bank trader Michael Blumenroth.

Geopolitical tensions increase interest in bullion as a safe-haven investment and are also a prime factor driving up oil prices, which also influence gold.

Oil rose nearly 10 percent to a high of $42.20 a barrel as Middle East violence served as a reminder that political tensions could threaten crude supplies. They later slipped back below $40 a barrel, limited by economic troubles.

“Further geopolitical tension should inflate the risk premium in current precious metal prices, which should translate into increased upside potential in the near term -- barring any significant decline in financial market systemic risk,” Standard Bank analyst Manqoba Madinane said.

The dollar, the other main external driver of gold, weakened against the euro, helping to lift bullion prices. A softer dollar typically supports gold, which is often bought as an alternative investment to the U.S. currency.

The dollar fell broadly on Monday as a grim outlook for the U.S. economy weighed.

SILVER GAINS

Among other precious metals, silver tracked gold higher to a two-week high of $11.23 an ounce from $10.64 late on Friday. By late in New York’s session silver trimmed its early rise to $10.75/10.85 an ounce.

Investment demand for silver-backed exchange-traded funds remains strong.

The world's largest silver-backed ETF, the iShares Silver Trust SLV.A, said its bullion holdings rose more than 30 tons, or 0.5 percent, on Friday to their highest level since late October.

The New York-based trust has recorded an inflow of more than 106 tons of silver since the beginning of December.

Platinum group metals also climbed. Platinum touched a session high of $931 an ounce, its strongest in 10 weeks, and held most of those gains onto late New York business at $915.50/920.50 an ounce, against $888.50 on Friday.

“The white metal should benefit from further bargain hunter interest in coming sessions, with chart resistance pegged at $938/44/74,” James Moore, an analyst at TheBullionDesk.com, said. “However, the metal still remains overshadowed by slowing auto demand and shifting market fundamentals.”

Fears over falling demand from the car industry, which accounts for around half of global platinum consumption, has knocked platinum down by as much as two-thirds from the all-time high of $2,290 an ounce it reached in March.

Spot palladium rallied nearly 7 percent to a session high of $186.50, lifted by gains in other precious metals and in oil. It was quoted at $185/190 an ounce in late Monday trade in New York, up from $174.50 on Friday.

Additional reporting by Jan Harvey in London; Editing by Walter Bagley

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