Gold prices rose on Thursday as investors sought safety in bullion, fearing the $700 billion bailout plan for investment banks in the United States could be derailed by Congress.

Spot gold was at $888.65/889.65 an ounce at 1007 GMT compared with $881.00 late in New York on Wednesday.

The metal has gained about 20 percent since Sept. 11, when a collapse in the share price of US investment bank Lehman Brothers raised questions about the stability of the US and global banking system.

'Weekends recently have tended to be perilous times,' said Nick Moore, commodities strategist at RBS. 'There is concern that the weekend could bring fresh concerns about the bailout plan because of political dragging.'    

The US Congress is close to reaching a deal to approve the package, but investors are wary.

Gold is used as hedge against financial chaos. Also a positive for gold is an expectation of further dollar weakness, which normally boosts gold as it makes commodities priced in dollars cheaper for holders of other currencies.

But this time, there is the added element of investors using the precious metal as an alternative currency. 'Gold prices are rising as the era of loose credit draws to a close and the ensuing global crisis leaves few solid instruments for cautious investors to hold onto,' said investment bank Fairfax in a note.

Looking ahead, gold is likely to be supported by physical demand from the world's largest consumer India, which is approaching its traditional wedding and festival season.

Also on the agenda is the end of the fourth year of the Central Bank Gold Agreement on Friday.

The World Gold Council said last month around 319 tonnes of gold have been sold so far by the European Central Banks that signed the agreement, out of a quota of 500 tonnes allowed in each year.

'It will be interesting to see how much of the allocation has been taken,' Moore said. 'It looks as if it could be fully taken up.'    

While that news may temporarily faze the market, it is unlikely to do any lasting damage to confidence in gold's ability to weather the financial and economic storms.

'Given the weaker US economic and dollar outlook, increased safe-haven demand and improved technical picture gold is in a strong position to push higher and challenge overhead resistance located at $925/938/945,' TheBullionDesk.com said in a note.

A measure of investor interest in gold is the record holdings in SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, which on September 23 to a record 724.94 tonnes.. 'It's a lagging indicator, but useful to see the trend,' a trader said.

SPDR has seen its holdings increase by 18 percent or more than 100 tonnes since Sept. 15. Platinum was at $1,199/1219 from $1,192.50 late on Wednesday, palladium at $248/246 from $246 and silver at at $13.42/13.50 from $13.21. - Reuters