Gold surged 2 percent on Friday, gaining as much as $40 per ounce in a knee-jerk rally as fears that unrest in Egypt would spread across the Middle East prompted safe-haven buying.
Confusion breeds contempt for all investments other than gold. Clearly, money is flowing to gold as the ultimate safe haven ... because nobody knows how this situation is going to resolve itself, said Dennis Gartman, publisher of the Gartman Letter, a daily investment commentary.
Investors often turn to gold as an insurance at the expense of paper currencies during political and economic uncertainty.
Gartman said he did not expect Egypt's unrest to be over anytime soon, and that gold could further benefit from chaos possibly spreading to other countries in the region.
Spot gold rose 2 percent to $1,338.39 an ounce by 2:43 p.m. EST, the largest one-day gain in nearly two months. U.S. gold futures for February delivery settled up $22.3 at $1,340.70 an ounce.
Spot silver rose 3.5 percent to $27.82 an ounce.
U.S. COMEX gold futures volume totaled about 300,000 lots, roughly two-thirds higher than its 30-day average, and silver's volume was 35 percent higher, preliminary Reuters data showed.
Turnover during Friday's rally matched the higher volume earlier this week, when prices tumbled.
The dollar and U.S. Treasuries rose as Egypt's protests drove investors to seek safer assets. Stocks fell around the world and other commodities gained, led by oil, which jumped to nearly $100 a barrel in London.
Egyptian President Hosni Mubarak sent troops and armored cars onto the streets of Cairo and other Egyptian cities on Friday in an attempt to quell street fighting and mass protests demanding an end to his 30-year rule.
The market is a little sensitive when people take to the streets as it reminds them of the riots in Greece a year ago, and that did lead to a flight into the safety of U.S. Treasuries, said Chris Rupkey, chief financial economist at Bank of Tokyo/Mitsubishi UFJ in New York.
Earlier in the session, gold touched a four-month low of $1,308.00 an ounce, having fallen 2.6 percent on Thursday on a run of firmer-than-expected U.S. economic data.
Despite Friday's rally, gold notched a four-week losing streak, its longest consecutive weekly decline in a year.
Hedge fund SHK Asset Management liquidated a U.S. gold futures position this week valued at over $850 million, more than 10 percent of the main U.S. futures market, and that led to a 14 percent drop in open interest, the Wall Street Journal said.
Gold initially weakened after data showed the U.S. economy gathered speed in the fourth quarter with the biggest gain in consumer spending in more than four years.
ETF INVESTMENT EASES
Investment demand for gold has been soft this year, with holdings of the SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, down another 3 tonnes on Thursday.
Holdings of the world's largest silver-backed ETF, the iShares Silver Trust, also fell on Thursday.
Some analysts said the confluence of selling from gold and silver ETFs and futures showed the characteristics of capitulation, and prices should rebound after a large number of investors exited their bullish positions.
Gartman said liquidation pressure in gold had run its course, after spot prices bounced off key support near their 150-day average in overnight trade.
Platinum climbed 0.7 percent to $1,793.50 an ounce and palladium gained 1.1 percent to $810.72.