LONDON Gold rallied on Tuesday after a ratings downgrade of Greece reignited fears of a worsening fiscal crisis and lifted interest in the metal as a shield against instability in the wider markets.
Spot gold was bid at $1,226.95 an ounce at 1450 GMT, against $1,220.15 late in New York on Monday. U.S. gold futures for August delivery were up nearly $5 at $1,229.10.
Analysts said the Moody's downgrade of Greek government debt ratings to junk was not unexpected, but it reminded investors Europe's debt crisis is not over. In the medium term, concerns over fiscal stability are likely to fuel further gains in the metal.
"We have got a lot of potential market disruption risk this year -- sovereign risk from Europe, fiscal tightening, at some point monetary tightening, and regulatory risk as well," said Michael Lewis, head of commodity research at Deutsche Bank.
"There are a number of external events that could be quite positive for gold." But he added that he expected the pace of gains to slow from the rate seen from the end of April.
On the wider markets, European and U.S. shares moved higher, boosted by strong demand for Irish and Spanish government debt and U.S. data showing inflation remained under control.
The euro rose further versus the U.S. dollar to trade above $1.23 on Tuesday after solid demand at the debt auctions soothed some worries about euro zone debt problems.
A stronger euro, and consequently weaker dollar, typically benefits gold, although the relationship has weakened this year as sovereign risk issues in the euro zone knocked the single currency while lifting bullion's appeal as a haven.
Physical demand for gold firmed a touch in Asia as prices slipped from record highs. Sales of scrap in the world's number one consumer, India, subsided although domestic prices were within sight of record levels.
Firm demand for physical bullion from investors also kept holdings of the world's largest gold-backed exchange-traded fund, New York's SPDR Gold Trust, at record highs above 1,306 tons on Monday.
From a technical perspective, the outlook for the precious metal is positive, said analysts who study charts of past price movements to determine the future direction of trade.
"The metal spent the last three days consolidating between $1,215 and $1,238, and probability now lies with the bullish trend for another attempt on its record high," said ScotiaMocatta in a note.
Silver rose by more than 1 percent to $18.40 an ounce against $18.16.
The ratio of gold to silver -- how many ounces of silver are needed to buy an ounce of gold -- fell to a two-week low on Tuesday near 66:1, showing the metal is becoming increasingly expensive compared with gold.
Platinum was at $1,555.75 an ounce against $1,557, and palladium was at $459.73.
Morgan Stanley upgraded the U.S. auto industry to "attractive" from "in-line" and said it sees higher levels of sustainable profitability for the sector, driven by restructuring, capacity rationalization and higher utilization.
The platinum group metals, which are primarily used in catalytic converters, are particularly sensitive to developments in the automotive sector.
(Editing by Jane Baird)