Gold Gains in Europe, Near 16-Month Highs

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"The market is positioned for another move on the upside. More importantly, I don't think the market was over-extended when we went through $700. So we have still got the capacity to build on long positions," David Holmes, director of precious metals sales at Dresdner Kleinwort Investment Bank, said.

Gold drifted higher on Tuesday and held within sight of a 16-month high, aided by a weaker dollar and speculation about a cut in U.S. interest rates.

Gold rose as high as $705.10 an ounce and was quoted at $704.10/704.90 by 1007 GMT, against $703.30/704.10 in New York late on Monday, when it had risen more than $3.

The metal hit its highest since mid-May 2006 at $707.10 on Friday against the backdrop of renewed concerns about the strength of the U.S. economy and a weaker dollar. Gold rose to a 26-year high of $730 in May last year.

"The market is positioned for another move on the upside. More importantly, I don't think the market was over-extended when we went through $700. So we have still got the capacity to build on long positions," David Holmes, director of precious metals sales at Dresdner Kleinwort Investment Bank, said.

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