Bullion rose above $1,730 an ounce for the first time in seven weeks after data showed the US economy grew less than expected in the fourth quarter and slower business spending hinted at softer growth early this year.
Gold buying sentiment also got a boost from reports that the world's biggest hedge fund, Bridgewater Associates, was bullish on gold as a hedge against inflation as governments print more money to reduce debt.
"With the softer-than-expected GDP reading, it means that at a minimum we are going to have a highly accommodative monetary posture," said Mark Luschini, chief investment strategist of Janney Montgomery Scott, a broker-dealer with about $54 billion in assets under management. "That should be supportive of the higher gold price, as it plays into the probability that QE3 may be in the offing," Luschini said.
Spot gold was up 0.6 percent at $1,729.86 an ounce by 11:35 a.m. EST (1635 GMT). It is up around 4.5 percent this week alone, its biggest one-week gain since the last week of October.
US gold futures for February delivery were up $2.90 at $1,729.60 an ounce at a strong volume.
Gold is on track to rise more than 10 percent this month, its best performance since August 2011, after a midweek rally triggered by the Federal Reserve when it said rates could possibly be held near zero until at least 2014 and that it would be ready to offer the economy additional stimulus.
"The Fed's announcement that it would keep its rates exceptionally low until 2014 was ... clearly not fully priced by the market," said BNP Paribas analyst Anne-Laure Tremblay.
"Real interest rates are likely to stay negative in the US in the next two years, which will be supportive of the gold price," Tremblay said.
Low interest rates particularly benefit zero-yielding gold, unlike stocks and bonds. Minimal borrowing costs also tend to fuel a gradual increase in commodity prices, supporting the metal's traditional role as a hedge against inflation.
Also helping gold was a weaker dollar versus the euro and stronger crude oil prices.
FED MOVE NEW CATALYST?
The debt crisis was a major driver of higher gold prices last year, as investors bought the metal as insurance against a worsening outlook for the euro zone. However, its rally stalled in late 2011 as the metal appeared to lose its appeal as a safe haven.
UBS analysts said the market attitude toward gold has largely been cautiously optimistic after the metal fell 10 percent and briefly entered a bear market in the fourth quarter.
"A fresh catalyst was needed and we think the FOMC outcome on Wednesday fit the bill. More accommodative policy is a very good foundation for gold to build on the next move higher," the Swiss Bank said in a note.
Among other precious metals, silver was up 1 percent at $33.77 an ounce.
Silver is on track for a near 20 percent rise in January, its biggest one-month gain since April 2011 when it rallied to a record $49.51 an ounce. Caution has dominated the market since then as the all-time high was followed by a sharp correction.
Spot platinum was up 0.7 percent at $1,614.24 an ounce, while palladium was down 0.4 percent at $684.97.
Platinum has outperformed palladium this month, climbing 15 percent for its biggest one-month rise since February 2008.