Bullion rose a the S&P 500 hit a low for year after data showed US services sector growth in July unexpectedly slumped to its lowest level since February 2010. The number of jobs created by the private sector also slowed.
Analysts said the weak data made the Federal Reserve more likely to keep US interest rates extremely low and its balance sheet bloated for an extended period to boost the sputtering economy.
This view brought investors into gold, along with jitters about a widening euro zone debt crisis and a possible downgrade to the US AAA credit rating. Global central banks also have been adding bullion to their reserves, a trend that many believe will continue.
"It's very hard to find an asset that investors are comfortable with for any length of time. There is an expectation that the government is trying to inflate in way out of the problem, and gold is functioning as the ultimate safe haven and currency," said Leo Larkin, metals equity analyst at Standard & Poor's.
Spot gold was up 0.6 percent at $1,669.06 an ounce by 12:35 p.m. EDT (1635 GMT), having hit a record $1,672.65 earlier. US gold futures for December delivery gained $27.30 to $1,671.80 an ounce.
Silver rose to three month highs, trading 2.9 percent higher at $41.98 an ounce.
Financial markets will watch the Fed's policy meeting next week for any signs of new monetary stimulus. Some market watchers suggested Chairman Ben Bernanke may take the opportunity at the Fed's annual retreat in Wyoming later this month to hint at economic stimulus through a third round of central bank bond purchases, or quantitative easing.
Gold has risen 13 percent since the start of July. Some analysts worried the sharp rally makes the precious metal vulnerable to a steep correction, but most said any pullback would be short-lived because there was enough safe-haven demand to put a floor on prices.
UBS strategist Edel Tully said the lack of a pullback attracted decent buying. The Swiss bank raised its three-month price forecast to $1,850, from $1,600.
Tom Holl, co-manager of the BlackRock World Resources Fund, said current fundamentals are supportive of these higher gold prices, fueled by investment demand amid fears of sovereign debt burdens, reserve currency valuations and persistent inflation.
Holdings of gold in exchange-traded products rose for an eighth day, to their highest level this year, after an inflow of more than half a million ounces into the world's largest bullion-backed ETF, the SPDR Gold Trust, which is now showing a net inflow for the year for the first time.
Investors who were nervous about the looming debt ceiling showdown poured $3.5 billion in July into exchange-traded funds that own gold, with the $65 billion SPDR Gold Trust added $2.9 billion of net inflow, fund tracking website IndexUniverse.com said.
CENBANKS ADD GOLD TO RESERVES
Further bolstering gold, International Monetary Fund data showed Thailand boosted its gold reserves for the third time in the last year, by 18.66 tonnes in June to 127.524 tonnes. Korea said earlier this week it bought gold in June and July for the first time in more than 10 years.
The IMF's monthly report on central bank reserves showed Thailand, Russia and Kazakhstan, among others, added to gold holdings two months ago, prolonging the trend to put more reserves into bullion rather than currencies.
Copyright Reuters, 2011