NEW YORK Gold surged more than 3 percent on Monday, surpassing $1,700 an ounce for the first time after Standard & Poor's cut the top-notch AAA credit rating of the United States, setting off an investor stampede for safety.
In a rout reminiscent of the 2008 financial crisis, Wall Street plunged nearly 7 percent and other commodities collapsed as panicky investors sought refuge in bullion and U.S. Treasuries.
Analysts scrambled to revise up gold forecasts and gold volatility spiked as options traders put on bullish bets.
News on Sunday of a European Central Bank bond-buying program to help shore up Italian and Spanish debt proved too little to soothe global market fears of a double-dip recession, greater government intervention and further market turmoil, any of which could extend gold's 15 percent rally since July.
In the first session since S&P's downgrade, U.S. gold futures posted their biggest one-day gain since March 2009. Traders are now looking ahead to Tuesday's Federal Reserve policy meeting, with growing expectations it may hint at an even longer period of ultra-easy monetary policy.
"People are concerned about outright default of sovereign debt in Europe, and inflation in the United States because of money printing," said Evan Smith, a portfolio manager at U.S. Global Investors, which has $2.5 billion in assets.
"Gold will continue to move higher ... It doesn't appear that policies on government spending and debt reduction will change in the near term," Smith said.
Spot gold was up 3.1 percent at $1,714.09 an ounce by 3:51 p.m. EDT (1951 GMT), having hit a record $1,719.99 and marking all-time highs when priced in sterling and the euro.
Silver rose 1.6 percent to $38.90 an ounce.
U.S. gold futures for December delivery settled up $61.40 at $1,713.20 an ounce. Trading volume was near 300,000 lots, one of the busiest sessions this year.
Bullion's $50 gain was also its biggest one-day price increase since November 2008, when equity markets plummeted following the Lehman Brothers bankruptcy.
Adjusted for inflation, bullion is one of the few in the commodity complex trading below its adjusted all-time highs estimated at $2,500 an ounce.
JPMorgan (JPM.N) said on Monday it expects spot gold to climb to $2,500 an ounce or higher by year-end, on very high volatility, following the downgrade of U.S. debt. The U.S. bank said its previous estimate of $1,800 was "too conservative".
The prospect of an even longer period of low U.S. interest rates prompted Goldman Sachs (GS.N) to raise its three-month forecast for the gold price by about $100.
GOLD VOLATILITY SPIKES
The CBOE Gold ETF Volatility Index .GVZ, which is often referred to as the "Gold VIX" and is based on SPDR Gold Trust (GLD.P) options, spiked 30 percent to its highest since May 2010.
"At any given moment the world's central banks could step up in an effort to calm a frantic situation. Gold may have been a one-way bet for some investors but as the risks to growth reach boiling point, so too does the price of protecting against a volatile movement in either direction," said Andrew Wilkinson, senior market analyst at Interactive Brokers Group.
The share prices of gold producers, measured by the ARCA Gold BUGS index .HUI, sharply lagged bullion as Wall Street dived. Still, Barrick Gold's (ABX.N) shares were among the top U.S. percentage gainers, while the price of SPDR Gold Trust, the No. 1 gold exchange-traded fund which largely tracks bullion's performance, rose sharply.
Gold benefited from safe-haven buying even as the ECB purchased about 2 billion euros in Italian and Spanish debt, the first time the central bank broadened its bond-buying program to include the euro zone's third- and fourth-biggest economies, aiming to avert a financial meltdown. <GVD/EUR>
"Investors are looking upon the ECB bond-buying as the first step toward the same kind of quantitative easing program the Fed is doing," said James Rife, assistant portfolio manager at Haber Trilix Advisors, which manages $2 billion in assets.
"So, gold acts as the only currency that you can't print more of, and you are seeing a huge institutional demand for it."
The price of the yellow metal rose above that of platinum for the first time since December 2008. Platinum prices turned lower on worries about demand from carmakers and were last up 0.1 percent at $1,713.49 an ounce.
Palladium was down 3.1 percent at $716.97. Palladium has fallen about 14 percent in the last six sessions from a five-month high, weighed down heavily by worries over auto demand.
(Additional reporting by Doris Frankel in Chicago, Amanda Cooper and Jan Harvey in London; Editing by Alden Bentley and Dale Hudson)