Gold rallied to its highest level in 28 years on Monday and targeted $800 an ounce as oil surged to a record peak and the dollar tumbled on speculation over a U.S. interest rate cut.

Other metals also jumped before easing in late trading, with platinum setting a lifetime high, silver rallying to its best level in eight months and palladium rising to a two-week high.

The market is in a bull run. The consensus here is that gold could reach $800 in a short term and that's motivating the market higher. Also the risk for a U.S. rate cut is feeding the trend, said Frederic Panizzutti, analyst at MKS Finance.

Profit-taking always remains a risk, but it's not a major concern. We expected it at $720, $750, and $780 and we haven't really seen any sharp correction so far. As long as the factors behind the move are in place, we shall see additional inflows.

Spot gold rose as high as $794.40, its best level since January 1980 when prices surged to a record high of $850 an ounce. It was quoted at $788.90/789.70 by 2:15 p.m. EDT, up from $783.80/784.30 in New York late on Friday.

Most-active December gold on the COMEX division of the New York Mercantile Exchange settled up $5.10 at $792.60 an ounce. It hit a low of $787.70.

Gold has surged 24 percent in 10 weeks, with higher oil prices elevating its role as a hedge against inflation and a falling dollar lifting its appeal as an alternative investment. The metal's price has doubled in about three years.

After adjusting for inflation, gold's record high level of $850 was equal to $2,079 an ounce at 2006 prices, according to metals consultancy GFMS Ltd.

The dollar slid to a record low against a basket of major currencies on expectations of a Federal Reserve interest rate cut this week. Oil jumped to a record high for a third day, surpassing $93 a barrel as Mexico briefly halted one-fifth of its production.

The slumping U.S. dollar is supporting precious metal prices and new all-time highs in crude oil are also supporting them, John Reade, head of metals strategy at UBS Investment Bank, said in a daily report.

But with positioning so long in all metals -- and no sign of supportive jewelry or industrial demand -- a correction, when it comes, will likely be brutal.

PRICE DRIVERS

The possibility of a Turkish incursion into northern Iraq also kept markets on edge.

Gold continues to be driven by the foreign exchange markets and strong oil prices, with fresh investor and fund buying seen coming into gold, Tom Kendall, metals strategist at Mitsubishi Corporation, said.

The dollar will remain under pressure at least until the U.S. rate cut decision on Wednesday. A correction in the dollar is overdue but it seems likely that gold will hit $800 first.

In addition to the Fed, the market will watch U.S. economic data this week including the advance reading of third-quarter real gross domestic product and October payrolls.

Spot platinum rose to a lifetime high of $1,465 an ounce to reflect gold's rally. It was last at $1,454/1,458, against its previous finish of $1,454/1,458 in New York. Tokyo platinum futures also hit record highs.

Silver hit a peak of $14.45, its highest since February, and was last quoted at $14.42/14.47, versus $14.20/14.23 an ounce late in New York on Friday. It hit a 25-year high of $15.17 in May last year. Palladium was slightly down at $371/375 compared with its Friday finish of $372/376 an ounce.

(Additional reporting by Frank Tang in New York and Lewa Pardomuan in Singapore)

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