Spot gold prices surged to a 28-year high in European trade on Thursday, as the dollar sank to record lows against the euro and oil traded near all-time highs -- raising the precious metal's appeal for investors.

Gold rose 2 percent to $735.85 an ounce, its highest since January 1980, when it hit a record high of $850. Bullion was later quoted at $734.70/735.50 by 10:20 a.m., compared with $721.10/721.90 in New York late on Wednesday.

The market was in two minds yesterday, jumping between $722 and $726, but the euro's push through $1.40 against the dollar gave the market fresh impetus to break up again, said Tom Kendall, metals strategist at Mitsubishi Corporation in London.

The higher we go, the more nerves will be jangling.

The dollar fell to lifetime lows against the euro, weighed by a hefty U.S. interest rate cut earlier this week and expectations of more moves to come. A weaker dollar makes gold cheaper for non-U.S. investors. Gold is also seen as a hedge against oil-led inflation.

Crude hovered just below record highs after U.S. inventories fell more than expected and as the threat of a storm gathering near Florida reignited supply concerns.

Technically speaking, we are moving through to uncharted waters if we breach $730 cleanly. And that would be very positive for gold because it does open up the upside, said David Holmes, director of metals sales at Dresdner Kleinwort.

The scenario is quite bullish. There is still an underlying credit concern that makes gold a sensible investment, he said.

A global credit crunch stemming from the U.S. high-risk mortgage sector has left investors looking for safe parking places for their cash, magnifying bullion's safe-haven status.

Gold's fundamentals are very strong. The rate cut by the Federal Reserve has brought more gold buyers back into the market on expectations of a weaker dollar, said Michael Widmer, director of research at Calyon Corporate and Investment Bank.

It's tough to see prices only going up, but for the moment it looks very good.

ETF GROWTH

Growth in bullion exchange-traded funds (ETFs) continued as investors diversified their portfolios. Gold used to back StreetTRACKS Gold Shares hit a record high of 577.10 tonnes on Wednesday.

London-based ETF Securities said investment in its gold ETF

had jumped 240 percent in the past seven weeks, with total assets under management exceeding $300 million. The product now holds nearly 350,000 ounces of gold, or around 11 tonnes.

In light of the prospects for further Fed (rate) cuts and potential for further U.S. dollar weakness, the recent increases into the gold ETFs could continue, said John Reade, head of metals strategy at UBS Investment Bank.

Bullion investors await a testimony from Fed Chairman Ben Bernanke on problems in the subprime mortgage sector before a congressional committee from 1400 GMT.

In other markets, the most-active December gold contract on the COMEX division of the New York Mercantile Exchange also hit a 28-year high of $744.40 an ounce on Thursday. It was last quoted at $742.70/742.80.

Other metals also jumped, with platinum rising to an 8-week high of $1,321/1,325 an ounce from $1,301.70/1,308.70.

Silver rose as high as $13.35, the highest in nearly two months, and was last at $13.34/13.39, versus $12.95/13.00. Palladium rose to $334/338 from $330.25/334.25 an ounce.

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