Gold prices surged to a new quarter-century high of $700 an ounce Tuesday as funds bought into the market, driven by tension between the United States and Iran and expectations of a pause in interest rate hikes.

Iran's president wrote in a letter to President Bush that democracy had failed worldwide and lamented "an ever-increasing global hatred" of the U.S. government. Secretary of State Condoleezza Rice rejected the letter Tuesday, saying it didn't resolve questions about the country's nuclear program.

Analysts at TheBullionDesk.com said Washington's dismissal of Iran's letter gave way to the gold rally, noting that it appears that tension with Iran will likely rise again, and also that the dollar will stay under pressure. A weakening dollar typically encourages investors to instead turn to gold, considered a safer alternative to the U.S. currency.

June gold futures on the New York Mercantile Exchange rose to $700 an ounce in late-morning trading, a level not seen since late 1980. That's up more than $20 from Monday's closing price of $679.90.

Nymex platinum also hit a fresh record of $1,240 an ounce.

"It's all fund buying," said Leonard Kaplan, president of Prospector Asset Management, about the gains. He added, "the market still believes the Fed is going to pause, and they spin every bit of news that the Fed is going to pause."

Other bullish factors that also appear to be causing gold to rise include high oil prices and concerns that Bolivia's nationalization of the energy market there could spill over into the mining industry, said George Gero of RBC Capital Markets Global Futures.

Gold appears poised to rise still higher, said Kaplan. "There's nothing to stop it," he said. "Nobody is going to short it here."

Gold broke through the $600-an-ounce level for the first time in over 25 years on April 6. Many analysts say it could surpass its all-time record of more than $800 an ounce, reached in early 1980.