Fears of conflict between India and Pakistan send gold price to a two-year high

Gold prices yesterday soared to their highest in more than two years, fuelled by funds keen for a secure asset as war fears mounted on the India-Pakistan border and Israel's government plunged into crisis.

Gold prices yesterday soared to their highest in more than two years, fuelled by funds keen for a secure asset as war fears mounted on the India-Pakistan border and Israel's government plunged into crisis.

A volatile cocktail of crossfire between nuclear-armed India and Pakistan, violence in the Middle East and a recent US warning that it might be the target of another attack, drove gold to 27-month highs in European commodity trading.

The gains crowned a winning streak that has taken gold 14 per cent higher since the start of this year.

Gold appears to have returned as a relatively safe investment against a background of continuing political and economic jitters. Analysts said the metal should now have increased prospects for further short-term price gains.

"Investors believe gold is becoming a viable asset. In this environment gold certainly has something going for it," said Peter Hillyard, senior manager at ANZ Investment Bank.

Standard Bank in London said: "With the funds continuing to believe in the yellow metal and the dollar appearing weak, the price looks set to test resistance around $320."

Spot gold prices ended European trading at $316.50 a troy ounce, its firmest point in 27 months and gaining from late European levels of $312.50 on Monday.

Mr Hillyard said he saw gold prices rising to $325, while Ross Norman, analyst at TheBullionDesk.com, saw gold targeting $320 and possibly $340 in the next six weeks.

"Against a backdrop of other bullish factors which collectively suggest a sea-change in the gold market, the stock markets and the dollar are giving extra lift to gold which has now surpassed a two-year high and looks likely to continue to rally," Mr Norman said.

This week's dollar fall to its lowest against key currencies in 2002 – it hit seven-month lows against the euro and five-month lows against the yen on Monday – has boosted gold. As the metal is priced in dollars, a weaker dollar makes gold cheaper to buyers outside the US.

The global political tensions, coupled with expectations of rising Iraqi exports, sent oil prices sharply lower. Brent crude oil futures dropped by 76 cents to $25.62 per barrel by close of trade in London, while US crude futures plunged by 93 cents to $27.40.