Gold rallied to its second record high in a week on Thursday, driven by growing investor unease over the outlook for the U.S. economy after data showed an unwelcome pickup in inflation, and over the lack of resolution to the European debt crisis.

Asset such as stocks, corporate bonds, industrial commodities and higher-yielding currencies slid after investors lost more appetite for risk, to the benefit of gold, government bonds and the dollar itself, which many resort to in times of extreme market nervousness.

Although gold remains off its inflation-adjusted peak above $2,000 struck in 1980, it is one of the top performing assets this year, up by over 25 percent versus a 15-percent loss in U.S. blue-chip stocks .SPX or a 7.7-percent decline in the price of copper.

So far in August, the price has risen by more than 11 percent, putting it on track for its biggest monthly gain since November 2009.

Growth in the United States, which last week lost its top-notch credit rating, has been patchy, while European leaders struggle to contain the spread of the debt crisis that has forced Greece, Portugal and Ireland to seek emergency funding and now threatens to swamp Italy and Spain.

Spot gold was up 1.6 percent on the day at $1,816.09 ounce by 1300 GMT, having hit a record $1,817.90 and was on course for a 9 percent gain over the last two weeks, its best two-weekly performance since mid-February 2009.

Gold is still enjoying firm support from mounting concerns over the global economy. Investors are becoming more and more worried that slowing economic growth will push developing economies into recession, which has seen market participants move distinctly to a risk-off stance, said Standard Bank analyst Leon Westgate, in a note.

In this environment of risk aversion, gold should continue to garner investor interest, as evidenced by the continued buying by ETFs.

GOLD IN DEMAND

Demand for gold has been fairly evident through increases in holdings of the metal in exchange-traded funds and rising open interest in U.S. gold futures, building on a decline in the second quarter of the year.

The World Gold Council said in a report on Thursday overall gold demand fell 17 percent in the second quarter to 919.8 tons, as growing interest in jewelry, coins and bars failed to offset a sharp decline in ETF buying.

Investment in ETFs fell by more than 80 percent on the same quarter last year, although inflows this year are up by a net 6 percent, with most of that investment materializing in the last month, according to ETF data monitored by Reuters.

In Europe, plans from France and Germany to move toward fiscal union in 2012 got a chilly response from other euro-zone countries and failed to reassure investors worried about the region's debt crisis and weakened economies.

The U.S. Federal Reserve Bank is taking a closer look at the U.S. units of Europe's biggest banks, concerned that a euro zone debt crisis could spill into the U.S. banking system, the Wall Street Journal reported.

The $2.5 trillion U.S. money market funds industry -- which supplies short-term dollar funding to banks -- has retreated from the euro zone in recent months, concerned that the continent's debt crisis is spiraling out of control.

In other fundamental news, Venezuelan President Hugo Chavez said the country will nationalize its gold industry and is moving its international reserves out of Western countries.

In other precious metals, silver XAG= rose 1.1 percent to trade at $40.62 an ounce.

Platinum was flat at $1,837.00, while palladium was down 1.0 percent at $762.47 an ounce.