updated 11/29/2005 9:33:00 AM ET 2005-11-29T14:33:00

Gold prices broke through the critical threshold of $500 an ounce in Asian trading Tuesday for the first time since late 1987, driven by investor demand for the metal as a diversifying asset. Prices retreated in later trading.

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A fourth consecutive day of strong Japanese buying sent gold above the milestone, traders said, bringing the metal’s gains to 10 percent in less than four weeks.

Spot gold rose as high as $502.80 in intraday trading before slipping back to $500.60 late Tuesday in Asia. In later London trading, gold was at $497.10 bid per troy ounce, still up from $495.20 on Monday.

Driving the upward momentum is gold’s appeal as a hedge against currency weakness, inflation and financial instabilities in general, traders said.

Japanese buyers are apparently being encouraged by strong technical trends and possibly concerns about further yen weakness, Barclays Capital said in a report.

Recent reports that Russia wants to buy more gold in a bid to diversify its foreign reserves have also helped push gold higher, Tokyo traders said.

Opinion is divided on gold’s next immediate move, but there is general agreement that the market could see further gains in the longer run. Some participants expect to see profit-taking in a technically overbought market, while others say sentiment seems strong enough to lift prices higher.

“It’s difficult to say now. The market expected some selling around this level but the Japanese just keep on buying,” said Ellison Chu, senior manager at Standard Bank London’s Hong Kong office.

Chu and other traders in Asia expect spot prices to “shuffle along” between current levels of $495 to $502 in upcoming sessions in preparation for a run toward the next major upside target at $520 to $530 an ounce.

In Tokyo trading, investors sold gold futures to take profits, but traders said gold prices may rise further if they end in New York above $500.

“A lot will depend on what happens tonight. If spot gold ends in New York over $500, I would expect Japan’s gold futures market to turn quite bullish,” said Yuki Sonoda, a precious metals analyst with Daiichi Commodities.

Copyright 2005 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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