Gold hit fresh record highs on Wednesday as U.S. stock markets resumed their decline on concerns over the U.S. and euro zone economies, and after the Federal Reserve said U.S. interest rates would stay near zero for at least two years.
Spot gold hit a high of $1,779.14 an ounce and was up 1.6 percent at $1,771.45 an ounce at 1428 GMT. It also hit record highs in euro and sterling terms.
It has rallied more than 6 percent so far this week after a downgrade to the U.S. credit rating on Friday battered assets seen as higher risk, helped by simmering worries over euro zone debt and the U.S. economic outlook.
"All these accumulating problems -- the U.S. debt problem, the euro zone debt problem, political discontent -- are really (creating) a perfect storm for gold," said Bayram Dincer, an analyst at LGT Capital Management.
"The strong statement yesterday from Fed Chairman Bernanke on holding zero interest rate policy until mid 2013 is, from a real opportunity cost perspective, very beneficial for gold," he added.
The Fed on Tuesday promised to keep interest rates near zero for at least two more years and said it would consider further steps to help growth.
The comments support the view that the opportunity cost of holding non-yielding gold would remain depressed.
In early trade they also supported equities, keeping a lid on gold's gains, but the metal later rallied back above $1,770 an ounce as U.S. stocks dropped nearly 3 percent as investors fretted about the economy and high levels of public debt.
On the currency markets, the dollar steadied against the euro as the single currency slumped on growing concerns that France could be the next AAA-rated country to be downgraded after the U.S. debt rating was cut last Friday.
Worries over the financial health of some euro zone countries is also a powerful driver of gold. "When you have a metal that has three or four distinct reasons why it has headed higher, it is very difficult not to be bullish in that environment," said Mitsui Precious Metals analyst David Jollie.
"This is a market where people are worried, they're concerned about risk, and gold has certainly benefited strongly from its safe-haven status."
U.S. gold futures for August delivery were up $31.10 an ounce at $1,775.10.
ETF FLOWS CHOPPY
Holdings of gold-backed exchange-traded funds were choppy, meanwhile. Global ETF holdings, calculated by Reuters, fell 7.2 tonnes on Tuesday in their first daily decline in thirteen sessions.
The world's biggest gold-backed ETF, New York's SPDR Gold Trust, reported its biggest one-day outflow since Jan. 25 on Tuesday, of just over 13 tonnes. A day before it had seen its largest daily inflow since May last year.
A large outflow was also seen from the iShares Silver Trust , the main silver ETF, earlier this week. The trust said its holdings dropped by nearly 120 tonnes on Monday, the most in a single day since mid-June. They were unchanged on Tuesday.
The ratio of gold to silver prices hit its highest since early February in that session as silver was caught up in wider selling of commodities as gold climbed. It is currently near 46, off a 28-year low of around 31 hit in April.
"One explanation for weaker silver prices in the face of continued gold gains is that as an industrial metal, the prospect of slowing economic growth in many OECD nations would likely undercut silver demand," said HSBC in a note.
"Also silver does not generally benefit from the same measure of buying in times of financial stress as gold, as it lacks gold's credentials as a safe haven," it added. "(But) one of the reasons for silver lagging gold may be that the bullion rally could be beginning to tire."
Silver was up 1.9 percent at $38.34 an ounce. Spot platinum was down 0.3 percent at $1,744.24 an ounce, and palladium down 0.9 percent at $727.72 an ounce.
Gold regained its premium over platinum on Wednesday after hitting parity for the first time since Dec. 2008 earlier this week. It is expected to widen if confidence in the economic recovery remains fragile.