Gold surged to a record near $1,590 (U.S.) an ounce Wednesday as the possibility of more Federal Reserve stimulus coupled with Europe's deepening debt crisis fuelled bullion's longest winning streak in five years.
Bullion's gains accelerated after Federal Reserve Chairman Ben Bernanke said the central bank is ready to ease monetary policy further if the economy weakens and inflation moves lower. Silver rallied nearly 6 per cent, moving in tandem with commodities, U.S. stock markets and risk assets.
Bernanke's comment served as a hint that policymakers were actively mulling a third round of stimulus, a strong boost for gold.
Fears that the euro zone crisis is spreading to Italy, the region's third-largest economy, and uncertainty over frantic talks to raise the U.S. debt limit underpinned precious metals. Gold also hit all-time highs when priced in euro and sterling.
"We have fear and contagion risks in Europe, and we are getting a rally of risk assets on the back of Bernanke alluding to the Fed trying to stimulate the economy, what people refer to as QE3," said Jeffrey Sherman, commodities portfolio manager at DoubleLine Capital, with more than $12-billion in assets.
Spot gold rose 1.2 per cent to $1,584.39 an ounce as of 12:59 p.m. (ET). U.S. August futures gained $22.80 to $1,585.10 an ounce.
Options saw heavy call buying, suggesting market players expect underlying gold futures to rise further.
Spot silver was last up 5.3 per cent at $37.98 an ounce, set for its largest one-day gain in over two months.
While holding to a view that recent economic softness would eventually pass, Bernanke appeared less confident in that projection - and more willing to entertain the possibility of another round of stimulus.
Gold would benefit from additional U.S. monetary easing because such a move should weaken the dollar and stir inflation down the road. A worsening sovereign debt crisis in Europe could also prompt policymakers to mull further stimulus, which would increase bullion's safe-haven appeal.
The Fed ended its $600-billion bond-buying program known as QE2, for quantitative easing, because the addition of money to the monetary system effectively lowered U.S. interest rates.
Gold is up almost 30 per cent since Bernanke's Jackson Hole speech in August 2010, which marked the start of QE2.
Further financial and fiscal uncertainty is likely to fuel fund buying in gold, lifting prices even higher in the near term, said Mark Luschini, chief investment strategist at Janney Montgomery Scott, a broker/dealer with $54-billion in assets.
"The worst thing for gold would be to have the economy doing well enough that the Federal Reserve starts to normalize monetary policy, or conditions in the European Community begin to settle down," Luschini said. "As we can see, neither is happening."
Gold is set for an eighth consecutive day of gains, something it has not achieved since mid-October 2006, when it rose for nine days in a row.
It has risen around 12 per cent so far this year, versus the S&P stock gauge's 5.5 per cent gain, and a loss of 5 per cent for the dollar index. The metal has also more than doubled in price in the last four years.
OPTIONS VOLATILITY SOARS
Gold options volatility is soaring amid gold futures' rally this week. The CBOE gold volatility index, a fear gauge for the gold market, spiked 11 per cent to 19 Wednesday, its third day of sharp gains.
COMEX gold options floor trader Jonathan Jossen said one investor sold a huge position in $1,600 December call options and then bought twice as much in $1,750 December calls. Heavy call purchases suggest buyers expect underlying gold futures to rise further.
"Escalating gold prices speak volumes about investors' fears surrounding the euro zone, and gold's move to unchartered territory has spurred an increase in volatility," said Andrew Wilkinson, chief market analyst at Interactive Brokers Group.
Gold rallied to record highs in sterling, euros and the South African rand as well as dollars on Wednesday.
As for market fundamentals, South Africa's powerful National Union of Mineworkers said on Wednesday wage talks with the country's main gold-mining companies had deadlocked and it was preparing for a strike.