Gold rose 2.5 percent on Tuesday, on track for its largest one-day gain in about two months, as economic optimism sparked broad-based equities and commodities rallies as well as bullion buying after the metal's heavy losses last week.
Silver was up over 6 percent, set for its biggest one-day rally since May 2011. Gold was moving in lockstep with the euro, after an encouraging US manufacturing report and positive data from China and Germany suggested that global economic recovery was gaining steam.
A $4 rally in crude oil futures on rising tensions between Iran and the United States and surging grain prices also supported gold's gains. "With the sell-off that we had based on very low volume to end the year, the gold market snapped back and a significant amount of bargain hunting is coming in at those lower prices," David Meger, director of metals trading at futures brokerage Vision Financial Markets.
Spot gold was up 2.4 percent at $1,603.39 an ounce by 12:06 pm EST (1706 GMT), set for its largest one-day rise since November 7. Bullion was down 2.5 percent last week on a technical sell-off. US gold futures for February delivery were up $38 at $1,604.80 an ounce.
Silver rose 6.3 percent to $29.55 an ounce. Gold followed the near 2 percent gain in the S&P 500 index after data showed the US factory sector expanded at its fastest pace in six months in December. Bullion posted a gain of 10 percent for 2011, its smallest annual rise in three years. It remains down 16 percent from a record $1,920.30 set in September, and finished the fourth quarter with its first quarterly loss in more than three years. Simmering geopolitical tensions also boosted bullion investor sentiment.
Iran said it had successfully test-fired what it described as two long-range missiles, flexing its military muscle amid mounting Western pressure over its nuclear programme. Tehran has also warned it could shut the Strait of Hormuz, through which 40 percent of world oil is shipped.
"If the situation there (Iran) deteriorates and there are perceived to be significant risks to oil supply, then you would expect to see a significant move in crude prices and for that to spill into gold," Credit Suisse analyst Tom Kendall said. In other precious metals, platinum rose 1.7 percent to $1,417.50 an ounce and palladium rose 1.8 percent to $661.47 an ounce.
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