Gold futures closed higher Wednesday, as higher oil prices, a lower dollar and Israel's decision to expand its offensive further into Lebanon boosted demand for the metal as a safe-haven instrument and inflation hedge.

Gold for December delivery closed up $4.70 at $662 an ounce, after earlier touching a high of $666.50, its loftiest level in a week.

The contract closed lower on Tuesday as traders awaited the Federal Reserve's decision on interest rates. Most economists and analysts had expected the pause that policymakers agreed on after 17 consecutive moves and were most focused on the tone of the accompanying statement.

The Fed said inflation pressures remain but surprised some analysts by saying that they should moderate in the coming months. They also said economic growth had moderated because of high energy costs and the gradual cooling of the housing market.

Economists were divided on whether the statement leaned more toward further rate hikes or an end to the cycle, concluding that the central bank had left all options open.

"Also of note, the FOMC decision was not unanimous, with Richmond Fed President Jeffrey Lacker in dissent with the 10-member committee's decision, favouring a 25-basis-point hike rather than to keep rates unchanged," said analysts at Standard Bank.

Jon Nadler, investment analyst at bullion dealers Kitco.com said the lack of unity exhibited by the Fed "reveals an anxious policy-making body that fears a recession just as much as it loathes the prospects of strong inflation."

As a result, many speculators are taking a defensive stance, capping gold's immediate gains.

Still, a sharply lower dollar was a support. The dollar was down 0.4% against the yen and 0.7% against the euro.

Crude-oil futures resumed their upward trend after weekly data showed a bigger-than-expected draw in inventories of oil and gasoline.

The latest headlines from the Middle East provided a safe-haven boost for gold.

The Israeli government is planning to push deeper into Southern Lebanon in a bid to flush out Hezbollah militants who have been firing hundreds of rockets into the country, the BBC reported.

The offensive would require an additional 30,000 troops, with Israel looking to advance as far as the Litani River, which is about 18 miles from the Israeli border, said the BBC.

The meeting comes as diplomats at the United Nations work on a revised resolution that calls for an end to the conflict. The resolution is being re-drafted to take into account Arab League objections to the initial text, notably the fact that it did not call for an immediate Israeli withdrawal from Southern Lebanon.

Iran also remains a concern as it continues to defy the U.S. and other Western powers over its nuclear enrichment program.

Analysts at Blanchard and Co., a retailer of rare coins and precious metals, said they expect gold and other metals to break back through the highs seen earlier this year as the market enters the traditional peak demand period between September and December.

"Each of the last four years after a declining or flat period in the summer months, we've seen significant gains in precious metals in the latter part of the year," said Blanchard Chief Executive Donald Doyle. "With the Fed pause and the possibility they are finished raising rates for the year, precious metals continue to be in particularly good shape to make significant gains moving into the fourth quarter of 2006."

Doyle cited a range of factors supporting his bullish case, including a continued slump in mine production, slowing central bank gold sales, a global tightening of liquidity, continued producer dehedging and rising oil costs.

"Gold is reasserting itself as a monetary asset," he said. Blanchard is forecasting gold to climb to $825 an ounce by year end, with silver following with a new high of $18 and ounce.

Silver futures closed up 31 cents at $12.57 an ounce. Platinum was up $7 at $1,263 an ounce and palladium was up $2.95 cent at $326.70 an ounce.

Copper rose 10.8 cents to $3.71 a pound as the strike at the giant Escondida mine in Chile entered its third day.

On the supply side, gold inventories were unchanged at 8.16 million troy ounces as of late Tuesday, according to Nymex data.

Silver supplies fell by 309,548 troy ounces to 100.8 million. Copper supplies were unchanged at 6,756 short tons.

Indexes that track mining and metals stocks were higher. The Amex Gold Bugs was last up 2.9% at 346.83 and the CBOE Gold Index added 2.9% to 150.04.

The Philadelphia Gold and Silver Index was up 2.5% at 148.64.