Gold bars
Gold bars Lisi Niesner

Gold prices surged Monday and the dollar plunged as investors piled into stocks in the hope that Europe's sovereign debt crisis may finally be ending and the continent's financial system is beginning to stabilize.

The global equity rally, plus a move by safe-haven investors into the only alternative to the weakening dollar -- namely, gold -- lifted the yellow metal throughout the day's trading session. Strong Asian demand for physical gold also buoyed its price.

Gold is remaining bid-up on not just [a weaker] dollar, but particularly buoyant physical demand amongst retail investors, Ross Norman, chief executive at London-based bullion brokers Sharps Pixley, told MarketWatch. Demand in China has been especially strong, with the bars selling at more than a $3 premium over London prices, he noted.

The spark for the stock rally, which lifted major U.S. and European stock indexes as much as 3 percent, came Sunday when German and French leaders emerged from an emergency meeting vowing cooperation on a robust plan to save the continent's banks.

Europe's banks are seen as the next domino to fall -- unless German and French leaders can agree on a credible rescue plan -- after Greece defaults on its national debt, something already priced into the markets.

German Chancellor Angela Merkel and French President Nicolas Sarkozy concluded Sunday's meeting promising to recapitalize Europe's banks, damaged by the collapsing value of the bonds they hold from weak European nations like Greece, Spain and Italy.

While a detailed plan was lacking, we view any progress on bank recapitalization as a positive for gold, said UBS in a note. Typically liquidity concerns and funding issues are not gold's friends.

The promised rescue excited stock investors, who abandoned the dollar, leaving the greenback down in early afternoon trading on the US ICE Dollar Index Futures by more than 1.7 percent.

There's a sense now that we're marching toward some attempt at a broader plan to support the euro area, Alan Ruskin, global head of Group-of-10 foreign-exchange strategy at Deutsche Bank AG in New York, told Bloomberg. We're drawing to a point where they will come up with a plan and the market is willing to give them the benefit of the doubt until we see the plan.

Among gold miners, Barrick Gold Corp. jumped 2.7 percent, Newmont Mining Corp. added 2.96 percent and Eldorado Gold Corp. surged 4.77 percent.

Among silver miners, Coeur d'Alene Mines Corp. shot up 4.92 percent and First Majestic Silver Corp. increased 4.95 percent.

Gold for December delivery rose $35 to settle at $1,670.80 - a 2.14 percent gain -- while gold for immediate delivery climbed $1.01 to $1,672.95.

Silver for December delivery added 99 cents to settle at $31.98, while silver for immediate delivery was off 18 cents to $32.06.

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