Gold rallied 2 percent to a new high above $1,820 an ounce on Thursday after data pointed to a stalled economy, while renewed concern about the health of European banks brought safe-haven buying.
Bullion's fourth consecutive daily rise came after news that factory activity in the Mid-Atlantic region plummeted and existing home sales unexpectedly dropped. Investors dumped stocks and other riskier assets for the perceived security of gold and U.S. Treasury securities. The Dow Jones industrial stock average fell more than 4 percent and crude oil plunged 5 percent. Bullion is headed for its seventh straight weekly gain.
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However, a break above $2,000 an ounce could be difficult due to weaker interest in gold exchange-traded funds and after a $350 rally in the past 1-1/2 months, analysts said.
"We hold gold because we believe that inflation will be part of the solution to address the problems of the world," said Axel Merk, portfolio manager of Merk Funds, which has $750 million in assets.
"We are potentially entering a stagflationary period," Merk said, referring to a period of persistent inflation combined with stagnant growth and high unemployment. Spot gold was up 1.8 percent at $1,820.49 ounce by 2:16 p.m. EDT, having hit a record $1,825.99. It is on course for a 9 percent gain over the last two weeks, its best two-week performance since mid-February 2009.
Silver rose 1.2 percent to $40.66 an ounce.
In addition to the disappointing manufacturing and home sales reports, U.S. Labor Department data showed that consumer prices increased at the fastest pace in four months in July, while weekly initial jobless claims rose.
On the gold options front, the CBOE Gold ETF Volatility Index, which is often referred to as the "Gold VIX" and is based on SPDR Gold Trust options, spiked 5 percent, the biggest jump in a week.
"Option dealers are buying a lot of calls and they are very bullish. With the stock markets selling off, people are hedging their portfolio with gold buying," said Jonathan Jossen, independent COMEX gold options floor trader.
Jossen said bullish option positioning included bull call spreads with strike prices that suggest gold could rally to $2,000 an ounce.
GOLD DEMAND FALLS
Some analysts said gold could pull back as much as 30 percent. On charts, the relative strength index shows bullion is well into overbought territory, and the metal has breached a multi-year rising channel top, suggesting a correction is possible.
The World Gold Council said overall gold demand fell 17 percent in the second quarter to 919.8 tons, as growing interest in jewelry, coins and bars failed to offset a sharp decline in ETF buying.
In addition, gold could hit $1,900 an ounce in the next six months, driven by buyers seeking an investment safe from global economic problems, but a further rise to $2,000 looks unlikely, said metals consultant GFMS, a unit of Thomson Reuters.
Platinum was down 0.2 percent at $1,832.74, while palladium dropped 2.2 percent to $753.22 an ounce.
2:16 PM EDT LAST/ NET PCT LOW HIGH CURRENT
SETTLE CHNG CHNG VOL US Gold DEC 1822.00 28.20 1.6 1786.80 1829.70 187,423 US Silver SEP 40.688 0.337 0.8 40.080 40.950 42,247 US Plat OCT 1847.70 6.90 0.4 1824.60 1849.00 6,679 US Pall SEP 757.00 -18.90 -2.4 748.30 779.70 3,676
Gold 1820.49 32.34 1.8 1784.80 1825.99 Silver 40.660 0.480 1.2 40.090 40.860 Platinum 1832.74 -2.86 -0.2 1826.50 1843.00 Palladium 753.22 -17.01 -2.2 751.02 777.00
TOTAL MARKET VOLUME 30-D ATM VOLATILITY
CURRENT 30D AVG 250D AVG CURRENT CHG US Gold 229,206 239,514 186,266 27.05 2.10 US Silver 58,250 70,599 60,266 41.2 -1.63 US Platinum 6,840 6,427 7,681 25.4 2.48 US Palladium 4,187 4,498 4,161