By Jan Harvey LONDON (Reuters) - Gold inched up on Tuesday as investors favored it as a hedge against medium-term dollar weakness and possible inflation, but remained below the previous session's record peak as the U.S. currency edged higher. The prospect of further dollar weakness and more gold buying by the official sector firmly underpinned prices, analysts said. Spot gold was bid at $1,169.50 an ounce at 1221 GMT, against $1,165.85 late in New York on Monday. U.S. gold futures for December delivery on the COMEX division of the New York Mercantile Exchange rose $5.50 to $1,170.20 an ounce. Gold prices have rallied 12 percent since the beginning of November, when reports emerged that India's central bank had bought 200 tons of gold from the IMF. Russia, Sri Lanka and Mauritius have all since also announced gold acquisitions. "Gold has proved over the last couple of days that profit-taking is not lasting very long," said Peter Fertig, an consultant at Quantitative Commodity Research. "Investors are coming in, especially if the U.S. dollar is under pressure against the major currencies. That is driving the market, as is speculation that another central bank will buy gold." "Definitely prices could still go higher -- $1,200 is within reach, and there is no reason why it should not be reached this calendar year," he added. Gold hit a high of $1,173.50 an ounce on Monday as the dollar slid against a basket of currencies, boosting interest in the metal as an alternative asset and making it cheaper form holders of other currencies. But prices have been kept in check on Tuesday by a recovery in the U.S. currency. The euro fell against the dollar on banking sector concerns, though it pared losses as a key measure of German business sentiment beat forecasts. WHOLESALE DEMAND Gold's slight correction from record highs led to a pick-up in wholesale demand for the metal in major bullion consumer India, traders said. Any further dips are likely to be met by strong buying, they added. "People are asking for $1,150, we have a few orders at that level," said a dealer with a state-run bank in Mumbai. Analysts and fund managers say that in addition to dollar weakness, inflation prospects in 2010 and more official sector buying are set to support prices. For graphic showing gold's relationship to inflation expectations, click on: here "The investment case for gold has become increasingly compelling, with central bank buying and a structural change in interest in gold as an investment at the retail level," said Standard Chartered in a note. The bank said although pockets of dollar strength would likely check gold's progress in the first half of next year, by the fourth quarter it is set to average $1,300 an ounce. The world's largest gold-backed exchange-traded fund, the SPDR Gold Trust, said its holdings stood at 1,121.457 tons as of November 23, up 3.964 tons or 0.4 percent from the previous business day. Among other precious metals, spot silver was bid at $18.62 an ounce against $18.59, platinum was at $1,453.50 an ounce against $1,454.50, and palladium was at $372 an ounce against $369. ETF Securities, which operates exchange-traded products that issue securities backed by physical commodities, said its palladium ETP holdings rose more than 13,600 ounces to a record high of 611,924 ounces on Monday. Holdings of its platinum-backed product edged up to 423,439 ounces from 422,762 ounces, also a record high.

Source