Gold rose on Wednesday in tandem with riskier assets, as the dollar fell on hopes the euro zone debt crisis will be contained after Slovakian parties agreed to boost the region's bailout fund.
Wall Street and industrial metals also posted sharp gains after Slovakian lawmakers said they would approve a plan to expand the powers and size of the European EFSF rescue fund. Bullion broke above the 20-day moving average, which inspired technical buying.
The precious metal has risen 2.5 percent in the past three sessions. Optimism about a plan to tackle Europe's debilitating crisis prompted gold, traditionally a safe haven, to move in sync with equities and commodities.
Investors are less concerned that what's going on in Europe will develop into some type of Lehman event, said Leo Larkin, metals equity analyst at S&P Capital IQ.
As long as people are confident that gold is not going to be sold off in panic, it can continue to go higher.
Spot gold was up 0.8 percent at $1,678.80 an ounce by 2:46 p.m. EDT.
U.S. gold futures for December delivery settled up $21.60 an ounce at $1,682.60. Trading volume was extremely thin for a third straight day at less than half of the 30-day norm, suggesting gold's gains may not hold.
Bullion held its gains after news that U.S. Federal Reserve officials in September mulled a fresh round of bond purchases among other steps to boost the economy.
Gold in recent weeks has moved with other commodities and assets perceived as higher risk, such as stocks, despite having had an inverse relationship with them earlier in the year as buyers sought the metal as a safe haven from risk.
The 30-day correlation between gold and world equities has turned positive for the first time in three months. The inverse link between gold and the dollar was at its tightest since July, indicating lack of clear direction among bullion investors.
Gold has been acting like a hybrid of a risk asset and a safe haven, Swiss bank UBS said in a note. And while buyers are nimbly returning, it is no surprise that there is caution given the struggle for conviction, UBS said
GFMS FORECAST, TECHNICALS IN FOCUS
Central banks, particularly in emerging markets, are expected to add more gold to reserves, underpinning prices.
Metals consultancy Thomson Reuters GFMS said central banks could buy nearly 500 tonnes of gold this year, raising its estimate from 336 tonnes last month.
Spot gold broke above its 20-day moving average for the first time in nearly a month. Some analysts said bullion was near a technical breakout after it had been largely in a trading range over the past two weeks.
Gold is slowing building up to the long side again. Any technical moving average we break has some significance to it, said Zachary Oxman, managing director of futures broker Trendmax.com.
If we can cross and close above $1,700, that's the key point to start buying again.
Asian physical demand for the precious metal has been buoyant, dealers said, and should remain so as India's wedding season and Hindu festivals, both major gold-buying events, get underway.
Silver tracked gold higher, up 1.6 percent at $32.69 an ounce. Spot platinum added 2.1 percent at $1,545.99 an ounce, while spot palladium rose 0.7 percent to $605.83 an ounce.
2:46 PM EDT LAST/ NET PCT LOW HIGH CURRENT
SETTLE CHNG CHNG VOL US Gold DEC 1682.60 21.60 1.3 1662.00 1693.90 103,021 US Silver DEC 32.789 0.791 2.5 31.860 33.100 33,749 US Plat JAN 1554.40 35.60 2.3 1522.40 1559.40 5,768 US Pall DEC 611.10 6.80 1.1 603.30 617.80 1,853
Gold 1678.80 13.37 0.8 1661.20 1691.60 Silver 32.690 0.530 1.6 31.900 33.030 Platinum 1545.99 31.69 2.1 1523.50 1553.50 Palladium 605.83 4.25 0.7 605.27 613.50
TOTAL MARKET VOLUME 30-D ATM VOLATILITY
CURRENT 30D AVG 250D AVG CURRENT CHG US Gold 106,649 222,595 203,112 35.7 1.55 US Silver 37,263 54,284 82,808 68.24 -3.90 US Platinum 5,850 12,251 7,567 25 2.00 US Palladium 1,855 3,939 4,540