Gold consolidated above the $1,100 level on Wednesday while oil prices extended their advance after strong gains in the previous session and copper maintained a hold above the key $7,000-a-tonne mark.

Gold traded at $1,118 a troy ounce after ending Tuesday's session in New York at $1,119.40.

James Steel, precious metals analyst at HSBC, said evidence of rising inflationary pressures in both the UK and India, an advanced and major emerging market economy, were an "outright positive" for gold prices.

Mr Steel noted comments from Thomas Hoenig, president of the Kansas City Federal Reserve Bank. Mr Hoenig said that the fiscal outlook for the US economy posed a risk to the Federal Reserve's ability to achieve its dual objectives of price stability and sustainable long-term growth and even posed a threat to the US central bank's independence from political authorities.

"The likelihood, however remote, that accumulated debt will force the Fed to monetise US debt and that the Fed could lose some of its independence, is supportive of gold prices, due to its inflationary implications," said Mr Steel.

Demand for gold jewellery dropped by a fifth last year, the biggest annual decline on record, but consumption showed signs of recovery as the year progressed, according to the World Gold Council which released its latest supply and demand update on Wednesday.

After a very weak first quarter in 2009, both jewellery and industrial demand enjoyed three consecutive quarter-on-quarter gains.

By the fourth quarter, jewellery demand had risen to 500.4 tonnes, up from 336.3 tonnes in the first quarter of 2009, driven largely by a rebound in the Indian market.

"While industrial and jewellery demand are expected to strengthen in an environment where economic conditions are improving, this recovery is likely to be relatively gradual," said Rozanna Wozniak, investment research manager of the World Gold Council:

The WGC said that jewellery markets in the west were likely to be constrained by high levels of unemployment, while budget constraints were the limiting factor in emerging markets as as incomes had not kept up with the rise in the gold price.

Total demand for gold fell 11 per cent to 3,385.8 tonnes last year. Investment demand rose 7.4 per cent to 1,270.9 tonnes, offsetting the weakness in the jewellery and industrial sectors.

Aram Shishmanian, chief executive of the World Gold Council, said that 2009 had provided a clear illustration of the diversity inherent in the global gold market.

"As the year progressed, a rebalancing of gold market fundamentals occurred, ensuring that as investment demand came off from the exceptional levels seen in the first quarter, total demand for the year remained robust thanks to a rebound in jewellery and industrial demand," said Mr Shishmanian.

US crude prices maintained a hold above the $77-a-barrel level, with Nymex March West Texas Intermediate up 34 cents to $77.35 a barrel while ICE April Brent gained 33 cents at $76.01 a barrel.

Among the base metals, copper rose 0.3 per cent to $7,168 a tonne while aluminium dipped 0.7 per cent to $2,123 a tonne.

Zinc fell 0.5 per cent to $2,315 a tonne following a big jump in stocks held at London Metal Exchange warehouses which rose 39,900 tonnes, the largest one-day increase since June 2005. Total LME stocks have reached 541,375 tonnes, the highest since late September 2005.

The International Lead and Zinc Study Group said the zinc market had a supply surplus of 445,000 tonnes last year, the largest since 1993.

Galvanised steel producers account for half of global zinc demand.

Noting that output by galvanised steel producers has recovered strongly, Michael Widmer, metals strategist at Bank of America Merrill Lynch said demand for zinc could increase by as much as 12.5 per cent this year.

But miners have been ramping up zinc production in response to rising prices. Mr Widmer said zinc mine output could increase by 1.1m tonnes this year so a global supply surplus was likely this year.

BofA Merrill Lynch is forecasting zinc to average $2,125 a tonne this year but Mr Widmer is expects prices to average $2,750 a tonne in 2011 as the market shifts to a small supply deficit.