Gold rallied back toward record highs above $1,800 an ounce on Thursday, driven by unease over the lack of a solution to the European debt crisis and sluggish growth in the developed world which has shaken investor confidence in stocks, bonds and hard currencies.

Prices have climbed to within $5 of last week's record high of $1,813.79 an ounce.

Although it remains off the 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 or a 7.7-percent decline in the price of copper.

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 1.1 percent on the day at $1,808.20 an ounce by 6:48 a.m. EDT, set for a 3.6 percent gain this week and a nearly 9 percent gain over the last two weeks, its best two-weekly performance since mid-February 2009.

"There is a genuine feeling that all of these issues are playing indirectly into gold, and the impact these factors have on the currencies mean people are getting out of those and into gold," said ANZ head of metal sales Peter Hillyard.

"I'm one of those people who think gold is going to $2,000 and it's getting there. The underlying reasons don't change, there is a lack of confidence in everything else," he said.

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.

Austria, Finland and Ireland all questioned bold proposals from French President Nicolas Sarkozy and German Chancellor Angela Merkel to give up sovereignty over budgetary policies as a means to shore up their 17-nation currency union.

"Investors were still digesting comments from Merkel and Sarkozy late on Tuesday night where the leaders pledged to defend the euro at all costs," wrote VTB Capital analyst Andrey Kryuchenkov in a daily note. "However, what the markets really need is a concrete action plan."

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 tonnes, 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.


"Although profit-taking, margin requirement hikes and seasonally soft physical demand could temper the rally intermittently, the external environment has turned increasingly fertile for gold," said Barclays Capital in a research note.

Gold's fortunes could be altered in the case of rising real interest rates, controlled inflation and a stable macro-environment, it added.

Later in the day investors will comb through weekly data on first-time unemployment benefit claims for a read on the health of the U.S. jobs market, as well as U.S. consumer prices.

Data on Wednesday showed the sharpest pick-up in producer prices excluding food and energy in six months in July, although weak consumer demand was expected to keep inflation at the farm and factory gate in check.

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 rose 0.5 percent to trade at $40.38 an ounce.

Platinum was flat at $1,835.74, while palladium was down 0.1 percent at $769.47 an ounce