Buying increased after the IMF sold 200 tonnes of gold to the Reserve Bank of India.
US gold futures scaled an all-time high $1 088.50 an ounce on Tuesday in a technical breakout, surpassing the previous record set October 14, as news of a gold sale by the International Monetary Fund to India boosted sentiment.
It eased Wednesday morning as investors took profits a day after it hit record highs despite the dollar's strength, but sentiment improved on bullion's growing status as a destination for diversifying official reserves.
The IMF said on Monday it had sold 200 tonnes of gold to India for $6.7 billion. Although an IMF gold sale had been flagged for some time, it lifted some uncertainty from the market by helping soak up supply.
"It's potentially bullish from several points of view," said Commerzbank analyst Eugen Weinberg. "Gold was kept off the market and sold directly to central banks so potential sales on market are limited."
Central banks sell gold on the open market when the price is rising, thereby capping gold price gains. However, sales from banks that are part of the Europe's Central Bank Gold sales Agreement (CBGA) are set at 400 tonnes a year in a bid to limit their price impact.
The IMF sale, part of an agreement to sell about an eighth of the Fund's stock, fuelled speculation that other governments -- including Beijing -- may be ready to diversify their reserves even at near record prices.
"It's a rumour but I'd say where there is smoke there is also some fire," said Weinberg.
The dollar hit a one-month high against a basket of currencies on Tuesday as investors retreated from risk assets, before paring those gains. The greenback later pared gains.
A strong dollar makes gold and other commodities priced in the U.S. unit less attractive for non-U.S. investors.
Gold's sharp rally in spite of a dollar rise showed that strong demand will continue support the metal.
"Gold is rallying regardless of currency actions," said Adam Klopfenstein, senior market strategist at futures broker Lind-Waldock.
Stephen Briggs, commodity strategist at RBS, said gold has clearly broken away from the relationship with the dollar.
"We wouldn't be surprised to see $1,100. It's gone up $25 in the space of half an hour, so how can one say?"
U.S. traders also said the gold market was finding support from potential for accelerated producer buybacks in as miners are keen to back gold they had previously sold forward.
Miners Anglogold Ashanti and Barrick gold both told Reuters on Monday that closure of their hedgebooks might happen ahead of schedule.
