(REUTERS) -- Gold rose to a three-month high on Thursday and headed for its biggest one-week rally in a month, spurred on by the strength in the euro following Europe's bailout deal with Greece, ahead of an options expiry later in the day.
A stronger euro, coupled with growing concern over the impact on inflation from crude oil trading above $120 a barrel helped spur a bid for gold.
Investment demand for gold through exchange-traded products has been more modest this week than at any time since the start of the year, while the recent rise in price has stymied some appetite for the metal among leading Asian consumers.
Spot gold was quoted at $1,782.96 an ounce at 1350GMT, up 0.4 percent on the day, after having rallied by more than $20 late in New York on Wednesday.
Generally speaking, the vibe in the gold market is certainly upbeat, Nikos Kavalis, a strategist at RBS, said.
There hasn't been that much gold-specific newsflow ... (but) the fact that we have Iran in the background is certainly helping through higher oil prices, which are a negative for most other industrial commodities. But for gold, it's positive as it boosts inflation-hedging and boosts its safe-haven attributes.
Brent oil powered to a nine-month high above $124 per barrel on Thursday due to heightened tension between Iran and the West.
Most-active U.S. gold futures are set for a 3.1 percent gain so far this week, which would be their largest weekly rally since late January. For February, the gold price has gained 2.2 percent in dollar terms but more than 7 percent in yen , reflecting the decline of the Japanese currency.
A further near-term boost to gold could come from the expiry of March options in New York later.
Wednesday's rally brought some hefty strikes into the money, with most open interest at $1,750 and $1,800 calls, which guarantee the holder the right, but not the obligation, to buy the metal at this price up to expiry. <0#GCH2+>
Further underpinning gold, the euro rose to a 10-week high against the dollar and its strongest level since November versus the yen on Thursday after better-than-expected German data eased concerns about the euro zone's economic outlook.
German business sentiment rose for a fourth month in February, beating expectations and raising hopes that Europe's largest economy is improving and will avoid recession.
Gold tends to move inversely to the U.S. dollar, so strength in the single European currency usually offers support. The one-month correlation with the euro has strengthened this week, meaning gold is more likely to move in line with the euro than it was earlier this month.
Investor appetite for gold as reflected by flows of metal into ETPs has been modest this week.
Holdings of metal in ETPs have only risen by a net 9,000 ounces this week, the smallest inflow since the start of the year, but in February alone have risen by more than 600,000 ounces to 70.354 million ounces.
On the Asian physical markets, buyers in India and China, the world's two largest consumers, were sidelined by the recent jump in price, which in turn triggered a flurry of scrap selling, according to local dealers.
However, a fall in the U.S. dollar against the Thai bhat encouraged some buying in Thailand, they said.
In other precious metals, platinum neared six-month highs, rising towards $1,730 an ounce for the first time since last September, following news on Wednesday that an illegal strike at the Rustenburg mine belonging to world number two producer Impala was likely to cut deliveries to customers in April by about 50 percent.
Spot platinum was up by around 0.5 percent on the day at $1,729.24 an ounce, having gained more than 10 percent in the last month based on market expectations for disruptions to supply from South Africa.
Demand for the metal, which comes mostly from the Chinese jewellery sector and from the European auto industry, where it is used in catalytic converters in engines, is under enough threat from slower global growth that analysts said the pace of rally might not be sustained for much longer.
After a near $400 rally since the Dec. 29 lows, we think that platinum has already achieved the most it can. We're reluctant to chase it materially higher from here, Edel Tully, a strategist at UBS, wrote in a note.
Yes, a stab at $1800 is possible, particularly if the headlines over the next few days confirm rising violence and unrest at Rustenburg. But we're concerned that the market has gotten quite long, and in a very short space of time.
Palladium was almost unchanged at $719.22 an ounce, while silver was quoted up 1.8 percent at $34.88 an ounce.