NEW YORK Gold rallied 2 percent to a new high above $1,820 an ounce on Thursday after U.S. data pointed to a stalled economy, while renewed concern about the health of European banks brought additional safe-haven buying.
Bullion's fourth consecutive daily rise came after news that factory activity in the U.S. Mid-Atlantic region plummeted and existing home sales unexpectedly dropped.
Investors dumped stocks and other riskier assets for the perceived security of gold and U.S. government bonds. The Dow Jones industrial stock average fell 5 percent and crude oil plunged 7 percent. Bullion is headed for its seventh straight weekly gain.
However, a break above $2,000 an ounce could be difficult due to weaker interest in gold exchange-traded funds and after a $350 rally in the past 1-1/2 months, analysts said.
"We hold gold because we believe that inflation will be part of the solution to address the problems of the world," said Axel Merk, portfolio manager of Merk Funds, which has $750 million in assets.
"We are potentially entering a stagflationary period," Merk said, referring to persistent inflation combined with stagnant growth and high unemployment.
Spot gold was up 2.1 percent at $1,825.60 an ounce by 3:00 p.m. EDT, having hit a record $1,828.50. It is poised to log a 10 percent gain over the last two weeks, its best two-week performance since mid-February 2009.
U.S. gold futures for December delivery settled up $28.20 at $1,822 an ounce. Trading volume topped 240,000 lots, the highest this week but below last week's pace.
Silver rose 1.2 percent to $40.65 an ounce.
In addition to the disappointing manufacturing and home sales reports, U.S. Labor Department data showed that consumer prices increased at the fastest pace in four months in July, while weekly initial jobless claims rose.
Adding to market nervousness and interest in gold was a Wall Street Journal report that the U.S. Federal Reserve Bank is taking a closer look at the U.S. units of Europe's biggest lenders.
Bullion rose broadly across major currencies, with gold priced in Japanese yen surging to a record, and euro-priced and sterling-priced gold near all-time highs.
On the gold options front, the CBOE Gold ETF Volatility Index, which is often referred to as the "Gold VIX" and is based on SPDR Gold Trust options, spiked 5 percent, the biggest jump in a week.
"Option dealers are buying a lot of calls and they are very bullish," said Jonathan Jossen, independent COMEX gold options floor trader. Investors are using option strategies such as bull call spreads and fences to bet on the metal's upside, he added.
GOLD DEMAND FALLS
Some analysts said gold could pull back as much as 30 percent. On charts, the relative strength index shows bullion is well into overbought territory, and the metal has breached a multi-year rising channel top, suggesting a correction is possible.
The World Gold Council said overall gold demand fell 17 percent in the second quarter as growing interest in jewelry, coins and bars failed to offset a sharp decline in ETF buying.
In addition, metals consultant GFMS, a unit of Thomson Reuters, said gold could hit $1,900 an ounce in the next six months, driven by buyers seeking an investment safe from global economic problems, but a further rise to $2,000 looks unlikely.
Platinum was down 0.1 percent at $1,833.00, while palladium dropped 2.5 percent to $751.28 an ounce.
(Additional reporting by Amanda Cooper in London; Editing by Alden Bentley and Dale Hudson)
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