Gold surged to a record near $1,590 an ounce on Wednesday as the possibility of more Federal Reserve stimulus coupled with Europe's deepening debt crisis fueled bullion's longest winning streak in five years.
Bullion's gains accelerated after Federal Reserve Chairman Ben Bernanke said the Fed is ready to ease monetary policy further if economic growth and inflation slow much more. Silver rallied nearly 6 percent, moving in tandem with commodities, U.S. stock markets and risk assets.
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Some market watchers expect gold to extend its rally to above $1,600 an ounce later this year, while bullish option bets point to bullion as high as $1,700 an ounce by December.
Fears that the euro zone crisis is spreading to Italy, the region's third-largest economy, and uncertainty over frantic talks to raise the U.S. debt limit underpinned precious metals.
"We have fear and contagion risks in Europe, and we are getting a rally of risk assets on the back of Bernanke alluding to the Fed trying to stimulate the economy, what people refer to as QE3," said Jeffrey Sherman, commodities portfolio manager at DoubleLine Capital, with more than $12 billion in assets.
Spot gold rose 0.9 percent to $1,578.89 an ounce as of 3:20 p.m. EDT. U.S. August futures settled up $23.20 at $1,585.50 an ounce, after trading between $1,564.60 and $1,588.90.
Spot silver was last up 5.3 percent at $37.96 an ounce, its largest one-day gain in more than two months.
Gold would benefit from additional U.S. monetary easing because such a move should weaken the dollar and stir inflation. A worsening sovereign debt crisis in Europe could also prompt policymakers to mull further stimulus, which would increase bullion's safe-haven appeal.
The Fed ended its $600 billion bond-buying program known as QE2, for quantitative easing, because the addition of money to the monetary system effectively lowered U.S. interest rates. Gold is up almost 30 percent since Bernanke's Jackson Hole speech in August 2010, which marked the start of QE2.
Further financial and fiscal uncertainty is likely to fuel fund buying in gold, lifting it above $1,600 before the year ends, said Mark Luschini, chief investment strategist at Janney Montgomery Scott, a broker/dealer with $54 billion in assets.
"The worst thing for gold would be to have the economy doing well enough that the Federal Reserve starts to normalize monetary policy, or conditions in the European Community begin to settle down," Luschini said. "As we can see, neither is happening."
Gold is set for an eighth consecutive day of gains, something it has not achieved since mid-October 2006, when it rose for nine days in a row.
The metal also rallied to record highs in sterling, euros and the South African rand.
It has risen around 12 percent so far this year, versus the S&P stock gauge's 5.5 percent gain, and a loss of 5 percent for the dollar index.
OPTIONS VOLATILITY SOARS
Gold option volatility rose sharply on Wednesday, as bullion investors bet that underlying future contract prices could extend a record rally on signs of more Federal Reserve stimulus coupled with Europe's worsening debt crisis.
COMEX gold options floor trader Jonathan Jossen said one investor sold a huge position in $1,600 December call options and then bought twice as much in $1,750 December calls. Heavy call purchases suggest buyers expect underlying gold futures to rise further.
"Escalating gold prices speak volumes about investors' fears surrounding the euro zone, and gold's move to unchartered territory has spurred an increase in volatility," said Andrew Wilkinson, chief market analyst at Interactive Brokers Group.
As for market fundamentals, South Africa's powerful National Union of Mineworkers said on Wednesday wage talks with the country's main gold-mining companies had deadlocked and it was preparing for a strike.
Platinum rose 1.5 percent to $1,755.74 an ounce, and palladium gained 2.2 percent to $778.97 an ounce.