Gold surged to a record high above $1,040 per ounce on Tuesday, as investors piled into the metal to preserve the value of their dollar-denominated assets against erosion by a weakening dollar and inflation.

Both spot gold prices and U.S. gold futures have benefited from a convergence of factors, including technical buying, a report that some oil producers could switch to other currencies to price their crude and worries about the potential inflation impact of unprecedented global fiscal stimulus.

In an environment where interest rates are virtually zero, the incremental cost of moving into gold is nil. It stands to reason for investors that gold is more desirable, said Jack Ablin, chief investment officer at Harris private bank in Chicago.

Spot gold hit a historic $1,043.45 per ounce, and was last up 1.9 percent at $1,036.10 at 2:36 p.m. EDT (1836 GMT), against $1,016.65 quoted late in New York on Monday.

Bullion surpassed its previous record $1,030.80 set in March 2008. Year to date, the metal has gained 18 percent.

However, Tuesday's all-time high was still sharply below the inflation-adjusted record pinpointed by analysts. Metals consultancy GFMS put that figure as high as $2,079 an ounce.

For a graphic on inflation-adjusted gold price:

http://graphics.thomsonreuters.com/109/GLD_PRCINF1009.gif

Most-active U.S. gold December futures hit an all-time high $1,045. December settled at $1,039.70 an ounce, up 2.2 percent or $21.90.

Bullion also hit six-month highs when priced in sterling and euros, breaking above 700 euros an ounce for the first time since early April.

For a graphic on gold's price in dollars and euros, click on:

http://graphics.thomsonreuters.com/109/GLD_PRCEUR1009.gif

The dollar slipped sharply after U.K. newspaper the Independent said Gulf Arab states were in secret discussions to end the use of dollars in oil trading. Big oil-producing countries later denied the report.

An interest rate hike in Australia also reinforced expectations the Federal Reserve will lag other central banks in ending its loose monetary policy.

Gold's rally was driven primarily by fears over currency depreciation. A weaker dollar, however, will eventually lead to import-led inflation down the road, analysts said.

This is more a concern about the dollar than inflation so it has become very much more a dollar story. At the end of the day, everyone concludes all roads seem to lead to a weaker dollar at the moment, said Chris Turner, head of currency strategy at ING in London.

A weaker dollar makes gold and dollar-priced assets cheaper for holders of other currencies. Gold is also used as a hedge against inflation.

A positive technical picture for gold fueled buying on the fund side, traders said. However, the weight of near-record long positions in New York gold futures still leaves the market vulnerable to a correction, analysts said.

PHYSICAL INVESTMENT DEMAND IN FOCUS

Physical demand for the metal was also rising. The largest gold exchange-traded fund, New York's SPDR Gold Trust, said its holdings rose for a second consecutive day and were up 1.5 metric tons as of October 5.

Traders said they were also seeing rising demand in India, the largest consumer of gold last year, ahead of Diwali, a major gold-buying festival, on October 19.

Mark Cutifani, chief executive of AngloGold Ashanti , the world's third largest and Africa's top gold producer, said he saw gold prices at $950 to $1,100 an ounce in the next 12 months, and they could break $1,100 if the U.S. economy continued to dip and investment demand rises.

The yellow metal's gains helped lift silver to a two-week high of $17.36 an ounce as investors bought it as a cheaper proxy for gold. It was last at $17.22 against $16.59.

Palladium hits its highest since August last year at $308.50. It was last at $306.50 against $298.50.

Platinum, the precious metal widely used in autocatalyst manufacturing, also benefited from gold's climb. It was last at $1,315 an ounce against its Monday late quote of $1,293.

For graphic on gold's correlation with stocks, the dollar and oil:

http://graphics.thomsonreuters.com/109/GLD_PRCCRR1009.gif

(Additional reporting by the New York Treasury Desk and Veronica Brown in London; Editing by Lisa Shumaker)

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