Gold for December delivery closed up $18.50 at $636.80 an ounce on the New York Mercantile Exchange after peaking at $637 to mark its highest closing and intraday levels since early September. The contract closed over $9 lower Wednesday as traders reacted to the Democratic Party sweep of Congress by consolidating recent gains. Prices tallied a loss of $10.90 over the past three days.

December silver closed at a two-month high of $13.05 an ounce, up 50 cents, or 4%, for the session.

U.S. voters wanted a resolution of Iraq, "but what they got is a new Speaker of the House," said Ned Schmidt, editor of the Value View Gold Report. "Apparently, the gold market now realizes the potential damage to the U.S. of the new Congress."

"Gold and silver are the only insurance policies available against the threat of the new Congress," he said.

There was further support for gold Thursday in comments from Peoples Bank of China Governor Zhou Xiaochuan who said at a Frankfurt conference that China has very clear plans to diversify its currency reserves, which now stand at more than $1 trillion. A wide range of instruments are under consideration, including gold and oil.

"The news is bullish for gold, but not really new," said Tony Crescenzi, chief bond market strategist at Miller Tabak & Co, who pointed out that central banks worldwide have been diversifying reserves since 2001.

Julian Phillips, an analyst at GoldForecaster.com, said funds are dominating the trend in the very short term, "but longer term, the fundamentals dominate the trend, which is up," he said.

Eyeing oil, dollar moves

Oil rose in a continued response to supply data that showed a smaller-than-expected rise in crude inventories in the latest week and a fifth week of declines in distillate supplies. See Futures Movers.

There was also speculation that the Democratic victory may lead to an earlier U.S. exit from Iraq than had been planned -- a move that may intensify violence in the country, spark a civil war and disrupt oil production.

Overall, it "seems like there's a movement back to the hard commodities," Flynn said, and it "looks like commodity funds are coming back in."

Meanwhile, the dollar gave back most of its early gains against the yen and extended losses vs. the euro as traders reacted to China's reserve diversification plans. Earlier, the greenback found some support when the Commerce Department said the U.S. trade deficit narrowed by 6.8% in September to $64.3 billion. Economists had expected a deficit of $66.3 billion. The U.S. trade deficit with China widened to a record $23.0 billion. See Currencies.

Separately, the Labor Department said prices of imported goods dropped 2% in October. Economists had expected prices to drop 1%. See Economic Report.

Against this backdrop, January platinum rose $33.70 to end at $1,201 an ounce and December palladium closed up $10.50 at $338.90 an ounce. December copper added 6.45 cents to finish the day at $3.309 a pound.

On the supply side, gold inventories were down 64 troy ounces at 7.53 million troy ounces as of late Wednesday, according to Nymex data. Silver supplies rose by 570,336 troy ounces to 107.4 million and copper supplies rose by 159 short tons to 25,664 short tons.

Metals shares finished higher, following strength in metals prices after closing lower in the previous session.

Tracking the sector as a whole, the Philadelphia Gold and Silver Index (XAU) closed at 142.37, up 4.4%, and the CBOE Gold Index (GOX) rose by 5% to end at 149.74. The Amex Gold Bugs (HUI) Index added 4.1% to close at 341.05.

The DJ Wilshire Nonferrous Metals Index rose by 2.6% to end at 5,233.43. The DJ Wilshire Industrial Metals Index closed at 3,086.47, up 1.8%, and the DJ Wilshire General Mining Index rose 2.4% to close at 1,367.43.

Mr Paulson says the group had been allowed to languish over the boom years. Henceforth, it will have a command centre at the US Treasury that will track global markets and serve as an operations base in the next crisis.

The top brass will meet every six weeks, combining the heads of Treasury, Federal Reserve, Securities and Exchange Commission (SEC), and key exchanges.

Mr Paulson has asked the team to examine "systemic risk posed by hedge funds and derivatives, and the government's ability to respond to a financial crisis".

"We need to be vigilant and make sure we are thinking through all of the various risks and that we are being very careful here. Do we have enough liquidity in the system?" he said, fretting about the secrecy of the world's 8,000 unregulated hedge funds with $1.3trillion at their disposal.

The PPT was once the stuff of dark legends, its existence long denied. But ex-White House strategist George Stephanopoulos admits openly that it was used to support the markets in the Russia/LTCM crisis under Bill Clinton, and almost certainly again after the 9/11 terrorist attacks.

"They have an informal agreement among major banks to come in and start to buy stock if there appears to be a problem," he said.

"In 1998, there was the Long Term Capital crisis, a global currency crisis. At the guidance of the Fed, all of the banks got together and propped up the currency markets. And they have plans in place to consider that if the stock markets start to fall," he said.

The only question is whether it uses taxpayer money to bail out investors directly, or merely co-ordinates action by Wall Street banks as in 1929. The level of moral hazard is subtly different.

Mr Paulson is not the only one preparing for trouble. Days earlier, the SEC said it aims to slash margin requirements for institutions and hedge funds on stocks, options, and futures to as low as 15pc, down from a range of 25pc to 50pc.

The ostensible reason is to lure back hedge funds from London, but it is odd policy to license extra leverage just as the Dow hits an all-time high and the VIX 'fear' index nears an all-time low - signalling a worrying level of risk appetite. The normal practice across the world is to tighten margins to cool over-heated asset markets.

The move is so odd that conspiracy buffs are already accusing SEC chief Chris Cox of juicing the markets to help stop the implosion of the Bush presidency.

As it happens, I used to eat Mexican enchiladas with Mr Cox 20 years ago at a dining club in Washington, where California Reaganauts gathered to plot the defeat of Communism. Die-hard Republican he may be, but I can think of nobody less likely to betray the public trust in such a way.

So one is tempted to ask if Mr Paulson and Mr Cox know something that we do not: whether other hedge funds are in the same sinking boat as Amaranth Advisers and Vega Asset Management, keel-hauled by bets on natural gas and bonds.

Or whether currency traders with record short positions on the Japanese yen and the Swiss franc are about to learn the perils of the Carry Trade, a high-stakes game of chicken where you bet against fundamentals with high leverage to make a quick profit. Everybody knows it will blow up if the dollar goes into free fall.

They had a fright last week when US growth for the third quarter came in at just 1.6pc, and new house prices plummeted 9.7pc year-on-year in the sharpest drop since the property crash of 1981.

The dollar dived from 119.65 to 117.57 yen in a heartbeat. With $2.9trillion of derivatives now trading daily on the currency markets alone - according to the Bank for International Settlements - is this the start of the most vicious short squeeze ever seen?

The futures markets have priced in a 77pc chance of a flawless soft-landing for America's obese economy, now living 7pc of GDP beyond its means off foreign creditors. They are counting on moderating oil prices, and - a contradiction? - another year of torrid world growth. Nice if you can get it.

They have not begun to price in the risk of recession, typically entailing a drop in the S&P 500 stock index of 28pc from peak to trough. Evidently, the equity markets assume the Fed can and will rescue them by slashing rates in time, if necessary.

They should examine a recent report by the New York Fed warning that whenever the yield on 10-year Treasuries has fallen below 3-month yields for a stretch lasting over three months, it has led to each of the six recessions since 1968.

The full crunch hits 12 months later as the delayed effects of monetary tightening feed through, even if the Fed starts easing frantically in the meantime. By then it is too late. "There have been no false signals," it said.

As of last week, the yield curve was inverted by 29 basis points, was continuing to invert further, and had been negative for over three and a half months. If the Fed is right this time, the recession of 2007 is already baked into the pie. Those speculative positions may have to be unwound very fast.

The ministry said both sides would continue talks in order to ensure that the bilateral agreement was signed at a summit of the Asia-Pacific Economic Cooperation Forum in Vietnam next week by the countries' top trade negotiators.

Russia has resisted sanctions against its commercial partner Iran proposed by the U.S. and its European allies, but analysts have said that a deal over the WTO could persuade Moscow to soften its opposition to punishing Tehran for its refusal to halt sensitive uranium enrichment.

Russia had refused a U.S. demand for an immediate increase in imports of American beef and pork before Russia completed a review of America's food inspection system.