Gold rose to an all-time high for a second straight day Wednesday as the U.S. dollar fell to a 14-month low against the euro ahead of an expected interest rate hike from the European Central Bank.
Silver surged to a 31-year peak for a third consecutive day as holdings of the world's largest silver exchange-traded fund hit a record. Precious metals also drew support from renewed sovereign debt fears amid Portugal's financial crisis and inflation worries as crude oil and corn gently pulled back from new peaks.
On the silver options front, investors used bullish strategies such as call spreads buying and put selling, even as implied volatility stayed largely flat, a sign that the metal is building momentum for another upward move.
"It is unquestionable that the demand for precious metals derives from the devaluation of the leading currencies - the dollar, the pound and the euro," said Angelos Damaskos, a fund manager at Sector Investment Managers.
Spot gold hit a record $1,461.91 an ounce before easing to $1,458.90 (U.S.) an ounce, up 0.6 per cent, by 2:40 p.m. ET. U.S. gold futures for June delivery settled up 0.4 per cent to $1,458.50.
The traditional inverse correlation between gold and the dollar appeared to be strengthening this week to a negative 0.8, as gold rose to successive records, but the link between the two could be erratic in the near term. A correlation of minus 1 indicates a perfect inverse link, and vice versa.
Gold remained far below its all-time inflation-adjusted high, estimated at almost $2,500 an ounce set in 1980 as a result of heightened geopolitical pressure and hyperinflation.
Gold was boosted as the euro climbed against the dollar to its highest in more than a year. The ECB was widely expected to raise its benchmark rate 25 basis points on Thursday, its first hike since the global economic crisis three years ago.
Higher interest rates usually weigh on gold, but the metal could gain if rate differentials weaken the U.S. dollar.
SILVER SOARS NEAR $40, GOLD RATIO FALLS
Strong investment demand drove silver up more than 1 per cent to a high of $39.75 - its best since January 1980, when the Hunt Brothers corned the market. Silver eased off the session high to trade at $39.52 an ounce, up 0.7 per cent.
"Either way, you are going to see a significant move from here. Even though we were up this much, I think you are going to see an even bigger move," said Dominick Cognata, a COMEX gold and silver options floor trader.
Holdings of silver in the iShares Silver Trust ETF are at a record 11,162.45 tonnes, up more than 240 tonnes so far this year.
The gold-silver ratio, which shows how many silver ounces are needed to buy an ounce of gold, fell to a 28-year low at below 37. Silver outperformed gold in the first quarter, rising 22 per cent, while gold rose 0.7 per cent.
"Silver has outperformed gold, but the real leader of this rally is gold. Uncertainty in the Middle East, the euro zone sovereign debt crisis and inflation are all reasons why gold is higher," said Bill O'Neill, partner of commodities firm LOGIC Advisors.
Reflecting the pick-up in investor demand for gold was the first inflow of the metal into the SPDR Gold Trust since March 16.
Investors remained focused on Thursday's policy meetings by the ECB and by two other major central banks. The Bank of Japan and the Bank of England are expected to hold rates steady.
In the United States, some Federal Reserve officials believe they would have to maintain easy monetary policy beyond this year, while a few said the central bank should move to tighter conditions before year-end.
Dennis Lockhart, the president of the Atlanta Fed, said on Wednesday the U.S. economy remained too fragile for the Fed to begin raising interest rates.
Gold has been a major beneficiary since the Fed has kept short-term rates near zero since December 2008.
For platinum group metals, spot platinum rose 0.1 per cent to $1,787.99 an ounce, while palladium slipped 0.5 per cent to $782.22.
Copper ended sharply higher, posting its biggest one-day gain in two weeks as currency-related buying and perceptions of healthier Chinese purchases fed the rally.
Copper's strength fed through to the broader base metals complex, with nickel rallying as much as 4.3 percent, lead extending a five-day rally, and aluminum hitting its priciest level since September 2008.
The more-optimistic tone followed a strong performance in Chinese equities, one day after the country raised interest rates for a fourth time since October. This strength indicated to investors that the tightening measures will not thwart demand from China, analysts said.