Gold rose above $1,360 an ounce on Monday on fears that Egypt's unrest could spread across the Arab world, while silver gained 2 percent on strong industrial demand driven by signs of an improving economy.
Bullion extended gains after notching its second consecutive weekly gain, and as trade data showed U.S. futures investors' bullish position rose last week for the first time this year.
There was a lot of commodities and metals buying this morning. Both silver and palladium, which have stronger fundamentals, are way ahead in the pack among the precious metals, said Miguel Perez-Santalla, vice president of Heraeus Precious Metals Management.
As for silver, it was primarily driven by industrial demand on expectations of strong consumption, he said.
The tightest physical silver supplies in four years has tipped the U.S. silver futures market into backwardation since last week, making near-term prices more expensive than more distant months.
Spot gold rose 0.4 percent to $1,360.85 an ounce by 2:45 p.m. EST.
U.S. gold futures for April delivery settled up $4.70 at $1,365.10 an ounce, with volume more than 50 percent below its 30-day average, in line with lower turnover last week. Some traders said dwindling volume could signal waning investor interest in gold.
Silver gained 2.2 percent to $30.51 an ounce, having earlier hit a near six-week high at $30.71, with turnover about 10 percent lower than its 30-day average.
The gold-silver ratio -- the number of silver ounces needed to buy an ounce of gold -- fell to near a five-year low, as silver has recently outperformed bullion.
Confidence in the longer-term strength of gold prices was demonstrated last week by a report showing investors were beginning to build up their exposure to U.S. gold futures.
The net non-commercial, or spec, long position in COMEX gold futures posted its first weekly rise since early January and the largest weekly rise since early April 2010, the Commodity Futures Trading Commission said in its weekly Commitments of Traders report.
FALLOUT AFTER EGYPT
Gold also benefited from safe-haven demand amid fears that political unrest will escalate in the Arab world after Hosni Mubarak's resignation after nearly three weeks of protests.
Police in Bahrain fired teargas and rubber bullets to break up pro-reform demonstrations stimulated by popular upheaval in Egypt and Tunisia. One protester was killed, witnesses said.
Meanwhile, Tunisia has deployed soldiers to stop a tide of illegal immigrants trying to reach Italy. Protests in the North African country ousted its president a month ago.
Traders also said that comments from European Central Bank Governing Council member Ewald Nowotny also boosted gold's inflation hedge appeal.
The European Central Bank is vehemently not turning soft on inflation but neither will it rush to tackle short-term price pressures, Nowotny said.
Traders awaited a raft of data, including Chinese inflation numbers and a euro zone growth report due on Tuesday, to give fresh direction to the market.
China's CPI reading for January will be released tomorrow and market chatter currently suggests it will be lower than expected, said UBS. Should CPI disappoint, this could act as a catalyst for gold to trend lower in the short term.
Platinum rose 1.3 percent to $1,824.99 an ounce, while palladium jumped 2.3 percent to $829.97.