Gold rose nearly 2 percent on Wednesday, outperforming equities for the third day in a row as renewed talk of U.S. and European monetary stimulus boosted the precious metal's appeal to investors seeking an inflation hedge.
Bullion was poised for its biggest daily rise in a month on speculation the European Central Bank will create new money to fund rescue operations for troubled euro zone countries, traders said.
Late on Tuesday, gold got a boost from talk that the Federal Reserve was exploring new tools to boost U.S. growth.
The gold market has been looking for any hints of any quantitative easing program. You are seeing this big bounce today off the fact that there could be something going on in euroland, said Jeffrey Sherman, commodities portfolio manager at DoubleLine Capital LP, which has $38 billion in assets.
Options-related buying above the popular $1,600 call strike price also lifted underlying futures ahead of Thursday's COMEX August option expiry. In addition, technical support helped as the metal now appears moving closer to break out of a trading range following Wednesday's rally, dealers said.
Spot gold was up 1.9 percent at $1,609.26 an ounce by 1:36 p.m. EDT (1736 GMT), having hit a near three-week high at $1,609.91 earlier in the session.
U.S. gold futures for August delivery were up $32.20 an ounce at $1,608.40, with trading volume on track to be the strongest in over a month, preliminary Reuters data showed.
Gold has held in a $75 range in July, its narrowest monthly spread since April. Weak seasonal buying in top bullion consumers such as India and China, waning inflows into gold-backed exchange-traded funds and euro zone debt jitters have limited price gains.
Spain and France jointly said stability in the euro zone needs the adoption of a single supervisory mechanism for the bloc's banks. Also, ECB policymaker Ewald Nowotny said he could see grounds for giving Europe's rescue fund a banking license.
U.S. equities were slightly higher, with he S&P 500 stock index .SPX paring early gains after new U.S. single-family home sales dropped by the most in more than a year and revenues from bellwether company Apple Inc APPL.O disappointed.
OUTFLOW FROM SILVER ETF
Silver rose 2.1 percent to $27.51 an ounce. Confidence in the metal remains shaky, however, analysts said, with investors wary of taking profits in the traditionally volatile asset.
The world's largest silver-backed exchange-traded fund, the iShares Silver Trust, posted an outflow of 69.36 metric tons (76.45 tons) on Tuesday.
Gold's rise also pushed its premium over platinum above $200 an ounce for the first time since January.
Platinum group metals, which are largely used as catalytic converters by the auto industry, underperformed gold. Spot platinum rose 1.3 percent at $1,396.24 an ounce, while spot palladium gained 1.3 percent to $563.75 an ounce.