Gold vaulted above $1,700 an ounce for the first time on Monday, after the respective pledges by the G7 and the European Central Bank to quell the turbulence in the financial markets did nothing to put investors at ease.

Traders said the ECB had made good on its promise to solve the euro zone debt crisis by widening its bond-buying program to include paper from Spain and Italy, but the move was not enough to allay deep rooted concerns about Europe's spreading debt crisis.

Friday's downgrade to the quality of U.S. sovereign debt by ratings agency Standard & Poor's was widely anticipated, but its longer-term impact on anything from mortgage rates to the economy is unclear.

Spot gold was set for a second consecutive trading rally, up 2.5 percent from Friday at $1,704.19 an ounce by 7:35 a.m. EDT, having hit a record $1,715.01 earlier and having traded at all-time highs in sterling and euros.

"Everyone was talking about Armageddon at the weekend and this morning, it's held the rot but doesn't remove the themes that have been driving the stock markets," said Saxo Bank senior manager Ole Hansen.

Investors have bought more gold in the last month than in the prior six months, looking at the increase in open interest on COMEX for speculators and money managers, as well as inflows into exchange-traded products.

Hansen said the upward progress of gold could be jerky.

"The question right now is if gold will be allowed to move much further. There has been a huge build-up in speculative and long positions across the board over the last couple of weeks, but I suppose that central banks buying more bonds is not helping the overall worry about how the economies are going to do over the months ahead," he said.

According to data from the Commodity Futures Trading Commission, which collects information on holdings of futures and options, and to ETF data collected by Reuters, investors bought over 18 million ounces of gold, or 30 percent of total identifiable investment demand in 2010, in the last month alone, compared with about 8.4 million in the year to early July.

Finance chiefs from the world's industrial powers pledged on Sunday to take whatever actions were needed to steady financial markets, spooked by the political wrangling in Europe and the United States over slashing their huge budget deficits.

FEWER "SAFE" HAVENS?

Treasury Secretary Timothy Geithner said U.S. Treasury debt is as safe as it was before the S&P downgrade, urging European leaders to ensure there is an "unequivocal financial backstop" for euro zone governments facing fiscal and debt problems.

"The uncertainty in the financial markets is keeping gold prices underpinned. It's essentially safe-haven buying," said Ong Yi Ling, investment analyst at Phillip Futures.

"One of the events that investors will watch is of course the FOMC meeting that is scheduled Tuesday ... investors will scrutinize the statement on the assessment of the economy and outlook for monetary policy."

Investors are watching for any statement on whether the Fed will ease monetary policy further. The Fed's $600 billion quantitative easing program, which ended in June this year, has been instrumental gold's rise, even if adjusted for inflation, the bullion price remains well below the all-time highs above $2,000 in the early 1980s.

The prospect of an even longer period of low U.S. interest rates prompted Goldman Sachs (GS.N) to raise its longer-term forecast for the gold price. Goldman said it had lifted its forecasts to $1,645, $1,730 and $1,860 on a three-, six- and 12-month horizon, respectively. Goldman had previously forecast the gold price peaking at $1,600 an ounce in mid-2012.

Meanwhile, gold in euros hit a record 1,195.66 euros an ounce, bringing gains in the last month alone to over 12 percent, while gold in sterling hit a peak of 1,043.76 pounds, for a gain of 9.3 percent in the same period.

In other precious metals, silver got a lift from the strength in gold as it can sometimes act as a cheaper safe-haven proxy for investors.

Spot silver was last up 3.7 percent on the day at $39.72 an ounce, while platinum rose 0.8 percent to $1,725.74 an ounce. The ratio of gold to platinum earlier fell to around parity for the first time since late 2008.

Palladium was last down nearly 1 percent at $734.45. The palladium price has fallen by more than 14 percent in the last 6 trading days, since hitting a five-month high.

(Additional reporting by Lewa Pardomuan in Singapore; editing by Keiron Henderson)