Gold price breaks the $500 level for first time in 18 years

The price of gold broke through $500 an ounce yesterday for the first time in 18 years, as financial investors continued to pile into the precious metal.

Analysts could see no fundamental reason for the strength of gold - there is no supply shortage - but most agreed the rally in recent weeks will continue. Since the US hurricanes in September, gold has shot up from about $430, as US and Japanese investors in particular have sought refuge in the historical store of value.

Yingxi Yu, the precious metals analyst at Barclays Capital, said: "There's a lot of froth in the gold market. The speculative positions are very significant, with physical buying largely absent."

A number of often vague reasons have been given by buyers of gold. These range from fears of terrorist attacks and bird flu to the expectation that central banks will start to build up their gold stockpiles and general macroeconomic factors, primarily the fear of inflation.

Alan Williamson, the head of commodities research at HSBC, said the justifications advanced for the runaway price "don't hold water". But he added: "There is a big bullish community out there. Sentiment is still very positive and it could go higher."

Hedge funds have been main gold buyers, with the upward momentum created bringing other investors into what has been a strongly positive play. Gold usually goes up when the dollar weakens but that inverse relationship has broken down in recent weeks as the dollar has gained ground, making the gold rally all the more remarkable.

Gold's all-time high was the $850, hit in 1980, and some suggest this could be tested. Philip Klapwijk, the executive chairman of the industry consultants GFMS, said: "Above $500 there is more upside than downside. Real gold prices are not that high historically - the peak of the rally may be two or three years away. There is a better than 50/50 chance that the $850 high will be taken out over the next two to three years."

Other precious metals have also taken off, as oil prices and bond yields have disappointed investors in the past few weeks. Platinum surpassed $1,000 an ounce yesterday, its highest price in more than two-and-a-half decades. Gold and platinum came slightly off their peaks later in the day's trading. Silver hovered at $8.26 an ounce - a breach of $8.43 would make the price the highest in 18 years.