Gold prices soared to a new record on Tuesday, driven higher by rising geo-political tensions in the Persian Gulf, inflation concerns and by investors seeking a safe haven from volatility in equity markets.

Gold hit a record $875.80 a troy ounce in Asian trade before easing back in European trading to $872.60, up 1.5 per cent from New York's late quote of $859.70 on Monday.

The recent assassination of Benazir Bhutto in Pakistan provided a catalyst for gold to break through its previous high of $850, set in January 1980.

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Geo-political tensions have also been heightened by news yesterday that US naval ships in the Strait of Hormuz in the Persian Gulf came close to firing on five Iranian boats which reportedly threatened them.

Fears that high commodity and food prices will push inflation higher while US economic growth slows has also helped the precious metal. So-called "stagflation" is negative for the US currency, which makes the dollar-priced metal cheaper to buy in other currencies.

After rallying in recent sessions, the dollar turned lower again on Tuesday, falling 0.3 per cent against the euro.
"Gold, as an alternative currency, may be expected to do well under a stagflationary scenario," said Tim Bond, head of global asset allocation at Barclays Capital.

Recent losses in equity markets have profited investors in bullion, with the metal's safe haven appeal coming to the fore. In spite of Monday's modest gains, the Dow Jones Industrial Average has lost 3.3 per cent since the New Year.
Investment demand for gold has been rising steadily with increased inflows nto gold exchange traded funds but this has been counterbalanced by weakness in jewellery consumption with importers in the key markets of Mumbai and New Delhi reporting that consumer demand is contracting.

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James Steel, precious metals analyst at HSBC, said: "There is a growing dichotomy in the gold market between investment demand, which is robust, and consumer demand for gold, which is contracting in most regions."

In China, trading on gold futures contracts is due to begin on the Shanghai Futures Exchange on Wednesday.

"This is the biggest event in the market since the launch of the gold exchange traded funds over the past few years as a (Shanghai) gold future will allow leveraged investment from Chinese investors and speculators," said John Reade of UBS: "We could see a few million ounces of gold bought via futures over the course of the next few months, but it is entirely possible that interest will exceed this."

The Shanghai Futures Exchange has announced that the base price for all its new gold futures contracts will be 209.99 renminbi ($28.85) a gram, equivalent to $897.34 a troy ounce.

In energy markets, Monday's sharp drop in oil prices was partially reversed on Tuesday. Fears that a possible recession in the US could dent demand from the world's biggest oil consumer underpinned a three-day decline following the run up to $100 a barrel for the first time last week.

By mid morning in London, Nymex West Texas Intermediate for February delivery was up 66 cents at euro 95.75 a barrel. February Brent crude was up 57 cents at $94.96 a barrel.