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NEW YORK (Reuters) - Gold prices rose for a second day on Tuesday on a rally in oil and as deepening worries over the severity of the European debt crisis prompted safe-haven buying.
Signs that Europe is still struggling to overcome its fiscal problems highlighted gold's appeal as an alternative investment, after the metal notched its biggest weekly decline since May last week on improving U.S. economic data.
European finance ministers will discuss increasing the effective lending capacity of their financial rescue fund next week, as Portugal defied pressure to seek a bailout. Japan, following in the footsteps of China, promised to buy euro zone bonds this month to help steady the single currency.
"Even though Japan is getting in the fray, the euro really hasn't been able to manage a recovery. It highlights the fact that there is a crisis and there will be further problems," said Bill O'Neill, managing partner at commodities firm LOGIC Advisors.
O'Neill also cited oil's surge as a factor behind the rise in gold. U.S. crude futures rallied 2 percent to settle above $91 a barrel on output disruptions and colder weather. Gold is often viewed as a hedge against inflation.
Spot gold rose 0.6 percent to $1,382.90 by 3:12 p.m. EST, while U.S. gold futures for February delivery settled up $10.20 at $1,384.30. The metal is about 4 percent off December's record high of $1,430.95.
Silver rose for a second session, up 1.7 percent on the day at $29.54 an ounce.
COMEX gold futures volume rose more than 5 percent above its 30-day average, but silver was about 25 percent lower, preliminary Reuters data showed.
Gold's recent price decline has spurred demand in India and China, a top bullion consumer ahead of the Lunar New Year in early February, pushing premiums for gold bars to their highest in two years.
China's inflation raced to a 28-month high of 5.1 percent in November, and it is unclear whether policy steps the government is taking will calm prices, benefiting gold.
After several weeks of almost unrelenting outflows, some of the larger exchange-traded funds backed by physical gold have also seen a pick-up in investor demand, despite the decline in the euro, which would normally erode appetite for gold.
The world's largest gold-backed exchange-traded fund, SPDR Gold Trust, said its holdings rose for the first time since mid-December to 1,272.682 tonnes by January 10.
Gold rose as the euro climbed on talk of increased Portuguese bond buying by the European Central Bank, but it struggled to hold session peaks given nervousness over a heavy schedule of debt issuance by southern European countries this week.
Concerns in the fixed-income markets over the likelihood of an international bailout for Portugal, which would be the third in a year after the rescues of Greece and Ireland, have undermined investor confidence and given gold a boost.
The focus this week is on whether Lisbon will be able to raise funds in the debt market on Wednesday, or be forced to turn to the European Union and International Monetary Fund for financial aid.
Gold, which rose 30 percent last year, has been a key beneficiary of investor concern over the fallout from the euro zone debt crisis.
"Where you have governments that are overindebted and need to get themselves out of that problem ... they can try to inflate their way out of difficulty, which is where you'd want to be holding gold instead, or can go down a route of fiscal retrenchment," Natixis commodities analyst Nic Brown said.
Improved U.S. auto sales and ongoing supply worries lifted platinum group metals, which are largely consumed in autocatalysts.
Platinum rose for a fourth consecutive day, up 1.6 percent at $1,765.50 an ounce, while palladium gained 4 percent, up for a second day, at $780.
Additional reporting by Amanda Cooper in London and Lewa Pardomuan in Singapore; Editing by Dale Hudson