Gold rallied for a second day on Wednesday as the euro rebounded following upbeat German economic data, building on gains in January that marked the metal's strongest starting month in 32 years.
Spot gold was up 0.5 percent at $1,746.25 an ounce at 1105 GMT, on course for a fifth straight week of gains.
It rose 11 percent in January, the largest one-month gain since August 2011 and the largest for the month of January since 1980, thanks to a combination of the weakness in the dollar from a Federal Reserve commitment to keep U.S. rates near zero, investor and consumer demand and central bank purchases.
Evidence of Germany's economic health helped boost the euro, and gold by extension. The single European currency was expected to remain under pressure from concerns about Greece, however, even after its finance minister said talks with private creditors on a swap deal vital to avoid a chaotic default, were one formal step away.
Analysts largely expect gold to rally this year, although many say that a pull-back in the near term looks likely.
Buyers have returned to the euro, which is helping the situation in gold. It had a bit of lacklustre profit-taking yesterday but didn't break anything important on the downside, which helped confirm that being long is back in vogue, Ole Hansen, senior manager at Saxo Bank, said.
The last two weeks have done a heck of a lot to confidence, and we've seen that attempted corrections have been short-lived, so the mood has definitely changed, but overall, we are overbought quite significantly ... so there will be some kind of consolidation.
The gold price has risen by nearly 15 percent since hitting six-month lows in late December.
Anecdotal evidence of robust Chinese demand over the Lunar New Year holiday last week, together with figures on holdings of the metal in exchange-traded funds and U.S. futures, have added to the perception that the investor mood towards gold has become more positive following December's sharp drop.
EURO ZONE SUPPORT
Concerns about Greece and Portugal are keeping demand for gold high and supporting the price. Yesterday gold defied the downward trend in commodity prices and a firmer U.S. dollar, increasing to an eight-week high of $1,748 per troy ounce, Commerzbank analysts said in a note.
There has still been no breakthrough in negotiations (on Greek debt) ... The sovereign debt crisis will thus continue to preoccupy the markets for some considerable time yet and should support the gold price, they said.
Gold priced in euros was trading at its highest in nearly six months, having also staged its biggest monthly rise in January since August, with a gain of 10 percent.
Holdings of metal in ETFs rose by over 650,000 ounces in January, marking the first month of net inflows in two months. December's outflows of nearly 1 million ounces coincided with the second-largest monthly drop in the gold price since the collapse of Lehman Brothers in late 2008.
Later in the day, U.S. data on nationwide manufacturing is due. The survey from the Institute for Supply Management is expected to show factory activity in the world's largest economy expanded at its fastest pace in January since June last year.
Silver outpaced the rest of the precious metals complex, rising nearly 2 percent on the day to trade at $33.77 an ounce. The silver price rose by nearly 20 percent last month, in its largest monthly rally in nine months.
Platinum and palladium both rallied in line with firmness across the industrial commodities complex as Brent crude oil futures gained nearly 1 percent on the day to around $112 a barrel and London Metal Exchange copper rose 1 percent to $8,405 a tonne.
An uptick in Chinese factory activity in January offered further support to raw materials prices.
Platinum, which relies heavily on Chinese consumers for jewellery demand, rose 1.9 percent on the day to $1,614.50 an ounce, while palladium, which depends on consumption in the Chinese car market for demand, gained 1.7 percent to trade at $692.47 an ounce.