Gold headed for its largest one-day rise in nearly a month on Monday and silver climbed almost 5 percent after Greece warned it will miss deficit targets set to avoid bankruptcy, unleashing a sell-off in equities and commodities.
European stocks slid nearly 2 percent, while U.S. crude futures fell 2.1 percent and palladium dropped 3.3 percent to hit one-year lows after Greece said it will miss the deficit targets set in July.
Gold has assumed a more habitual trading pattern of rising in times of uncertainty after staging its largest monthly drop since the credit crunch of 2008 in September as the escalating Greek crisis prompted investors to seek safety in the dollar.
Spot gold was up 2 percent at $1,655.19 an ounce at 1350 GMT. U.S. gold futures for December delivery were up 2.2 percent to $1,657.40 an ounce.
The environment for gold is still kind of perfect, said Ronald Stoeferle, gold analyst at Erste Group. We have negative real interest rates more or less all over the world, there's extreme systemic risk, and there is a very fundamental need for a safe-haven currency.
Gold's status as a haven has not been damaged by last month's sharp correction, he added.
We're still up (16.5 percent) in 2011. Compared to the equity markets, that's a pretty nice outperformance, he said. Corrections like this are healthy for the long-term uptrend.
On the currency markets, the euro slipped to within sight of an eight-month low against the dollar as mounting concerns of a Greek default deepened investor worries about the health of the euro zone's banking sector.
Financial markets are awaiting a spate of events this week, including key U.S. non-farm payrolls data on Friday and the European Central Bank's interest rates decision on Thursday.
The ECB is expected to leave benchmark euro zone rates on hold this week and signal a shift in its interest rate-rise cycle after a raft of weak economic data and a deterioration in funding conditions for some of the bloc's indebted nations.
Also on the slate, Federal Reserve chairman Ben Bernanke is scheduled to testify on the economic outlook to the Joint Economic Committee on Tuesday.
The head of the U.S. central bank put markets on notice last week, signaling that despite already having spent trillions of dollars to stimulate growth, the Fed would do more if inflation falls too far and the threat of deflation grows.
PRICE DROP PROMPTS PHYSICAL BUYING
The gold price fell nearly 11 percent in dollar terms in September, its largest one-month fall since October 2008. On a quarterly basis, however, the third three months of 2011 marked gold's strongest performance since the last quarter of 2010.
Gold's 20 percent fall from September's record high at $1,920.30 an ounce has tempted physical consumers of the metal back into the market, even though speculators cut their investment the precious metal in favor of owning U.S. dollars.
The latest data from the Commodity Futures Trading Commission on holdings of gold futures shows speculators cut their position to its lowest since the second quarter of 2009, highlighting the move from hard assets to U.S. dollars.
After the recent washout, gold positioning is far from extended and this is quite a bullish signal for price strength ahead, said UBS in a note. The 'clean' nature of current spec positions, along with physical and long-term demand, is creating a very healthy foundation for gold to climb from.
Markets are closed in number two gold consumer China for a public holiday. But demand from other key gold-buying regions has picked up in the last couple of weeks, pushing Asian premiums to their highest since the start of the year.
In the world's third largest consumer, Turkey, gold imports hit 18.23 tonnes in September, their highest in three years, data from the Istanbul Gold Exchange showed.
Silver was up 2.7 percent at $30.68 an ounce, having earlier risen as high as $31.38. It fell by nearly 28 percent in September, its biggest one-month drop since the early 1980s.
Echoing weakness in other industrial commodities, platinum fell 1.9 percent to $1,495.74 an ounce, while palladium dropped 3.4 percent to near one-year lows at $589.25.