Gold rose 1.5 percent on Friday, setting a record high for a second straight day and heading for its biggest one-week gain in 2-1/2 years on worries about stalled U.S. growth and Europe's debt crisis.

After rallying around 3 percent to a record $1,877 an ounce earlier in the session, bullion sharply pared initial gains as Wall Street found its footing on technical support. Rising oil and commodity prices also sapped some safety bids for gold after it had gained 6 percent over the past five days.

Right now, gold is inversely correlated with fear and nothing else. When stocks are down, gold's up, said Frank McGhee, head precious metals trader at Integrated Brokerage Services LLC.

If we see the stock markets rally, I would not be surprised to see profit-taking starting to set in.

The bullion market is awaiting the U.S. Commodity Futures Trading Commission's Commitment of Traders report later on Friday and next week's conference of central bankers in Jackson Hole, Wyoming.

Some analysts said Federal Reserve Chairman Ben Bernanke could unveil a third round of quantitative easing to revive economic growth.

Spot gold was up 1.4 percent at $1,849.49 an ounce by 11:59 a.m. EDT. It is on track for its biggest one-month rise in nearly 12 years in August and up 30 percent so far this year.

U.S. gold futures for December delivery were up $31.70 at $1,853.50 an ounce.

Silver rose 3.5 percent to $42.01 an ounce.

A raft of global economic data this week including sluggish German growth numbers and a weak U.S. manufacturing report sparked heavy selling of equities and riskier assets such as industrial commodities.

At the moment the market is just looking for relative safe havens, Mitsui Precious Metals analyst David Jollie said. You can see that in the selloffs across equity markets overnight. The strength of gold is the other side of the coin from that.

A near $400 rally in the price of the yellow metal has caused some strains in gold vault storage space particularly in the western United States, and some retail clients have had to pay higher service fees, Savneet Singh, chief executive of Gold Bullion International (GBI), told Reuters.

Singh said the premium of small physical bullion bars is now significantly above spot gold due to huge demand. GBI sells physical precious metals and offers delivery and storage services to institutional and retail investors.

Speculation was also rife on Friday that the CME Group, the world's largest commodity exchange, could raise margins on gold futures once more, after a similar move this month dampened the precious metal's sharp run higher.