NEW YORK Gold rose sharply on Thursday as investors sought its safe-haven status after the dollar and equity markets were hit by a slew of weak manufacturing data that indicated stagnant global economic growth.
Stock markets around the world fell, extending the previous day's sharp losses, on concerns about global economic growth and the timing of the ending of the U.S. Federal Reserve's stimulus program.
"The combination of the weaker dollar and the drop in equities markets has triggered fairly robust safe-haven buying in gold," said James Steel, metals analyst and senior vice president at HSBC in New York.
He added that weak manufacturing reports in China, Europe and the United States contributed to investors favoring gold.
Spot gold was up 1.66 percent at $1,391.30 an ounce by 3:13 EDT (1913 GMT). U.S. gold futures settled up $24.40, or 1.78 percent, at $1,391.80 per ounce.
While Fed officials stressed that no change in the stimulus program was likely for months at the earliest, investors are anxious about that possibility. The Fed's easy money policy is widely credited with fuelling massive gains in stocks this year and previously in gold.
The precious metal's advance followed losses a day earlier of more than 1 percent after Fed Chairman Ben Bernanke said a decision to reduce the central bank's bond-buying program could be taken in the 'next few meetings' if the U.S. labor market showed sustained improvement.
James Bullard, president of the Federal Reserve Bank of St. Louis, said he did not think the Fed was "that close" to starting the process of winding down support.
But, any sign of improvement in the U.S. jobs sector will be closely watched, as it may spur the Fed to scale back its stimulus efforts as soon as September, analysts said.
On Thursday, a report showed the number of Americans filing new claims for unemployment benefits fell last week, pointing to resilience in the labor market.
"It seems the market is now squarely focusing on the September 17-18 FOMC meeting for the Fed to make its move," ING said in a note.
The dollar index fell 0.77 percent against a basket of currencies. The euro zone common currency was up 0.6 percent, getting a modest lift from data showing the downturn across euro zone businesses eased slightly this month.
A euro zone purchasing managers' index showed that while the slump in business activity eased slightly in May, it pointed to a further contraction in the second quarter. HSBC's flash purchasing managers survey showed Chinese factory activity shrank in May for the first time in seven months.
"China's drop in factory activity is showing that the economy is still more fragile than we would have hoped for and that weighed down on stock markets and may be read as helping gold as a risk-off asset," Tuxen said.
U.S. manufacturing slowed for a second straight month in May as weak overseas demand and government belt tightening at home led to the sector's most sluggish growth rate since October.
As a gauge of investment, holdings in SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, fell 0.3 percent to 1,020.07 tonnes on Wednesday, the lowest in more than four years.
Physical gold demand in Asia was seen normalising as jewellers had largely replenished their stocks and retail investors satisfied their needs following record buying after the metal fell to a more than two-year low of $1,321.35 in mid-April, analysts said.
Contrary to gold's gains, analysts said platinum group metals slid in reaction to the weaker industrial sector reports.
Spot silver gained 1.71 percent to $22.57 an ounce, while platinum slipped 0.44 percent to $1,459 an ounce and palladium lost 1.28 percent to $734.46 an ounce.
(Additional reporting by A. Ananthalakshmi in Singapore; editing by William Hardy and Bob Burgdorfer)
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