Gold rose in Europe on Tuesday as the dollar extended the previous session's losses against the euro, with hopes for a global economic recovery encouraging investors to favour riskier assets over the greenback.
Gold's strength helped platinum and palladium to rise to their highest in over a year, boosted by hopes an economic recovery will lift demand and the launch of new exchange-traded products backed by the white metals in the United States.
Spot gold hit a three-week high at $1,127.55 and was bid at $1,124.45 an ounce at 1044 GMT, against $1,121.00 late in New York on Monday.
"Gold has bounced from the lows on the back of dollar weakness we've seen in the last few days," said Standard Chartered analyst Daniel Smith.
But he said he was cautious on the outlook for the metal. "Our view is that the dollar will be more rangebound than it was late last year, and that will make any upward rallies in gold difficult to sustain."
The dollar slipped across the board on Tuesday as investors poured fresh funds into riskier assets at the start of the year, and as the market awaited U.S. non-farm payrolls due later in the week.
Weakness in the U.S. unit boosts gold's appeal as an alternative asset and makes dollar-priced commodities cheaper for holders of other currencies.
Oil rose towards $82 a barrel, benefiting from rising demand for heating fuel as the cold snap continued in the United States and Europe. Gold tends to track crude prices, as the metal can be bought as a hedge against oil-led inflation.
On the physical market, gold buying in India, the world's biggest bullion consumer in 2008, continued for a second day on Tuesday as a strong rupee made the metal cheaper for domestic traders, dealers said.
"There is a little bit of buying interest as the rupee is in support," said a dealer with a state-run bank in Mumbai.
DEMAND RETURNS
Analysts say there are signs that physical demand is returning as buyers become acclimatised to higher prices. "Reports indicate that jewellery demand is picking up at these levels," said Fairfax analyst John Meyer in a note.
New York's SPDR Gold Trust reported sales on the first trading session of 2010, and its holdings dropped nearly 5 tonnes on Monday from the previous business day.
U.S. gold futures for February delivery on the COMEX division of the New York Mercantile Exchange rose $7.00 to $1,125.30 an ounce.
Silver prices tracked gold higher to a peak of $17.72 an ounce, their highest since mid-December. They were later at $17.59 an ounce, against $17.55 late on Monday.
Platinum hit a 16-month high of $1,528 and was at $1,525 an ounce against $1,521, while palladium reached its strongest level since July 2008 at $424 and was later at $422 against $418.
Investors are favouring the metals, used mainly in autocatalyst manufacturing, in part due to perceptions that a recovery in economic growth will lift car demand.
Traders will be scrutinising U.S. auto sales data due later in the session for signs of a recovery.
Many also hope the launch of U.S.-listed ETPs backed by platinum and palladium will open the metals up to a new wave of investment.
ETF Securities said late on Monday that a financial firm had bought 100,000 shares of its proposed U.S. platinum ETP, and delivery is scheduled by the end of the week.
