Gold climbed to a second successive record high on Wednesday as investors bet that a proposed $1 trillion European rescue will either fail to prevent a worsening euro zone crisis or will stoke inflation.
Clocking its biggest two-day gain since November, gold prices rose 1 percent to near $1,250 an ounce on Wednesday despite a limited recovery in risk appetite that lifted U.S. stock markets and boosted platinum and palladium by more than 2 percent, suggesting that other factors were extending gold's week-long rally initially triggered by a flight to safety.
Demand for gold was evident across the spectrum, with retail sales of coins and bullion surging, exchange-traded gold funds drawing a net flow of over $2.3 billion and open interest in U.S. futures nearing a record amid the European crisis and after last Thursday's tumult in U.S. stock markets.
For most traders, the focus remained squarely on Europe's efforts to stop the Greek debt crisis from spreading to other countries, although some also said that options-related buying and technical momentum had contributed to the gains.
There is still a lack of confidence in the European community whether or not this is going to halt the euro's decline because this is nothing more than an experiment, and people are not sure if anything will work, Bruce Dunn, vice president of trading at New Jersey-based Auramet Trading.
Spot gold hit $1,248.15 an ounce, a gain of nearly 20 percent since early February. It was at $1,245.25 an ounce at 2:22 p.m. (1822 GMT) from $1,232.05 late in New York on Tuesday. Prices have risen 3.5 percent in two days.
U.S. gold futures settled up $22.80, or 1.9 percent, at $1,243.10 an ounce.
Barclays Capital said that the two key drivers of gold are concerns about the stability of the global financial system and the risk of currency debasement or inflation.
While the first of these concerns may have been eased by the massive EU/IMF rescue plan, the second has arguably been heightened by it, Barclays said.
Gold priced in euros extended its record high to 988.31 euros an ounce on Wednesday, and has risen 28 percent since early February, outstripping dollar gold's climb.
The fact that gold bullion is a real asset, which does not depend for its value on any company or government, makes it compelling as a 'safe haven' investment. said Richard Davis, fund manager at BlackRock's Natural Resources team.
Investors and many traders think the scale of Greece's fiscal problems could make it tempting for the country to default, despite the package, which could start a run on the debt of countries such as Spain, Portugal and Italy.
Gold priced in sterling hit a record 840.68 pounds, and in Swiss francs a record 1,385.92 francs.
GOLD COINS, BAR DEMAND STRONG
A range of investors scrambled for gold exposure over the past week, with open interest in COMEX gold futures jumping nearly 6 percent in the past week to 583,504 lots on Tuesday, less than 10,000 contracts below the January 2008 record.
Smaller-scale investors piled into the world's largest gold-backed exchange-traded fund (ETF), the SPDR Gold Trust, which said its holdings remained at a record high of 1,192.150 tons as of May 11, having surged last week.
Gold ETFs, including the popular GLD, have seen more than $2.3 billion in net inflows in the six trading days ended Monday, TrimTabs Investment Research said.
Sales of smaller gold investment products like coins and bars also jumped. The Austrian Mint, which produces the popular Philharmonic gold coin, said it sold more gold in the two weeks from April 26 than in the entire first quarter, while the U.S. Mint is selling coins at twice its normal rate.
Elsewhere Swiss refinery Argor-Heraeus said investor demand for small gold bars and minted products had jumped tenfold since the start of the year.
Spot silver rose to $19.68 an ounce, its highest since March 2008. It was last at $19.64 from $19.28 late on Tuesday.
The world's largest silver-backed exchange-traded fund, the iShares Silver Trust, said its holdings rose to 9,115.15 tons as of May 11, up 27.43 tons from the previous business day.
Platinum was at $1,740.50 an ounce from $1,702 and palladium at $543.50 from $532 on Tuesday.
(Additional reporting by Pratima Desai and Jan Harvey in London)