Gold rose 1.5 per cent Friday, its biggest daily gain in two weeks, on safe-haven buying as investors fretted about euro zone debt after Fitch cut Greece's credit ratings.
Bullion fell early in the session before turning higher after Fitch downgraded Greece's rating and as the International Monetary Fund urged Europe to agree to more comprehensive measures to tackle the debt crisis.
The euro fell against the dollar on caution before upcoming Spanish elections this weekend and the uncertain Greek debt situation. Crude oil and commodities reversed early losses as the dollar pared gains, and the euro zone worries boosted gold and silver.
"A lot of the move this morning is prompted by the move of the dollar. That dollar strength is probably short-lived...It has largely run its course and may soon begin to reverse," said Jeffrey Kleintop, chief market strategist of LPL Financial, which has $100-billion in assets under management.
Spot gold rose 1.5 per cent to $1,514.49 by 2:52 p.m. ET. U.S. June gold futures settled up $16.50 at $1,508.90 an ounce, after trading between $1,486.40 and $1,515.80, which marked a one-week high.
Gold is up 1.5 per cent for the week. The metal is still 4 per cent lower after rallying to a lifetime high near $1,575 an ounce in early May.
Silver was up 0.6 per cent at $35.16, but remained down 30 per cent from the record $49.51 hit on April 28.
Bullion has dropped three out of the last four sessions on weak U.S. housing and manufacturing data and uncertainty about the end of the the Federal Reserve's bond-buying program.
"This week, we've had one of the worst weeks for economic data so far this year, as most of the data came in below expectations. I don't think that will be the case next week," said Kleintop, whose firm has an overall commodity allocation of between 10 to 20 per cent.
Managed money sharply scaled back their bullish bets in COMEX gold futures and options to the lowest level since March as prices fell sharply, U.S. regulator data showed.
Investor sentiment took a toll on Monday when billionaire financier George Soros dumped almost his entire $800-million stake in bullion in the first quarter, well before a commodities slump blamed partly on reports he was liquidating his holdings, regulatory filings showed.
VOLATILITY RISING, OPTION EXPIRY
CBOE gold volatility index, a gauge of bullion investor anxiety, rose 3 per cent, its first rise this week, after the metal moved in a $30 range on Friday.
COMEX options expiry next week were also keeping prices hemmed in around the $1,500 mark, where sizable open interest was aligned, said Tom Kendall of Credit Suisse.
Prices tend to gravitate toward large pools of open interest as options expire. June options are scheduled to expire May 25.
Also supporting gold was news that the cost to hedge against a U.S. government debt default rose on Friday to its highest level since January ahead of the government's sales of $99-billion in securities next week.
Worries persist over Washington's struggle to reach a deficit-cutting deal and to raise its $14.3-trillion legal borrowing limit, which was hit on Monday.
Gold is among one of the assets expected to fall in the three months after the end of the Fed's second massive bond buying operation, also known as quantitative easing, or QE2, a Reuters poll found. QE2 is scheduled to expire in June.
Bullion was up 20 per cent since August when Fed Chairman Ben Bernanke's speech at Jackson Hole, Wyoming marked the beginning of QE2. The Fed is not expected to raise interest rate for the rest of 2011.
On the charts, gold kept finding support at its 50-day moving average, a level it has held for more than three months.
"Gold's been given every opportunity to break this week, and it has refused to do so, and now it appears in the process of breaking out to the upside instead. We are much impressed ... enough so to add to our gold positions," said Dennis Gartman, publisher of The Gartman Letter.
Silver was set to end the week about 1 per cent lower for its third consecutive weekly decline.
Holdings of the largest silver-backed exchange-traded-fund (ETF), New York's iShares Silver Trust , dropped 2.32 per cent on Thursday from Wednesday.
The drop in iShare silver holdings suggests rallies will continue to prompt bouts of long liquidation from speculative investors, research firm FastMarkets said in a note.
Among platinum group metals, platinum was up 0.4 per cent at $1,769 an ounce, while palladium rose 1.4 per cent to $733.97.