Gold Hits Five-Year High as Dollar Reels

LONDON (Reuters) - Gold hit its highest level in more than 5-1/2 years Tuesday as weakness in the dollar, rallying oil prices and fears of a war with Iraq opened the gates for a flood of fund money into the safe-haven asset.

Spot gold hit a high of $341.25 an ounce, its firmest level for the metal since June 1997 and a 1.5 percent gain from closing levels in New York Monday.

"The slump in the dollar has caused gold to spike upwards to $340 overnight, with the sharp jump in oil prices and heightened fears of a war with Iraq adding to the bullish sentiment," said Lawrence Eagles, analyst at commodities trader GNI.

"Historically when gold performs like this it tends to keep going," Eagles said.

Gold prices have climbed 23 percent in a ragged and halting rally throughout 2002, spurred by a cocktail of geopolitical tensions from the Middle east to Kashmir and a slump in global equity markets and the dollar.

A move by leading gold miners to reduce their forward sales of the metal to take advantage of rising spot prices rather than hedge their sales in forward markets has also helped gold's rally this year.

"Even with a very large net long fund position ... further price gains cannot be ruled out in the current environment," said Barclays Capital.

Gold's latest jump was triggered by a weakening of the U.S. dollar against the euro, which added to fears over higher oil prices and a growing list of political tensions.

The dollar tumbled to new three-year lows against the euro and slid on the yen as the market tightened its focus on the prospects of war with Iraq after the United States found fault with Baghdad's weapons declaration.