| NEW YORK/LONDON
NEW YORK/LONDON Gold rose 2 percent on Monday in a risk rally with equities and commodities, as the dollar tumbled after a renewed Franco-German pledge to introduce a plan to resolve the euro zone's debilitating debt crisis.
Trading volume of gold futures was extremely thin due to the U.S. Columbus Day holiday.
Bullion notched its biggest one-day gain in a week, as U.S. stock markets, oil and the euro surged following remarks by German Chancellor Angela Merkel and French President Nicolas Sarkozy to unveil a new comprehensive package to contain the crisis by the end of October.
In the past four sessions, the metal gained 3 percent as bullion prices have moved up and down in sync with the S&P 500, while the safe-haven buying that spurred gold's three-year rally was largely absent.
"Gold is rallying as a commodity instead of a flight-to-quality asset. Until that trend changes, you can get your head ripped off trying to play the other side of it," said Adam Klopfenstein, senior market strategist at futures broker MF Global.
"Right now, the theme for gold is its positive correlation with equities and the commodity spectrum," he said.
Spot gold was up 2.1 percent by $1,672.70 an ounce by 2:26 p.m. EDT.
Silver was up 2.8 percent at $32.03 an ounce.
U.S. gold futures for December delivery settled up $35 at $1,670.80 an ounce.
Volume was about two-thirds below its 30-day average as banks, government offices and the bond market are shut for the U.S. Columbus Day holiday. Even so, Monday's turnover was sharply lagging the level on last year's Columbus Day.
Jonathan Jossen, COMEX gold options floor trader, said more options dealers are buying volatility following a recent decline in gold option prices, indicating the price of the underlying gold futures is due for a rally.
Bullion rose about 3 percent as U.S. stocks rallied on optimism about Europe. The S&P 500 is now more than 10 percent above a low last Tuesday that took the index briefly into a bear market.
The 25-day log-based correlation between gold and S&P 500 was at a negative 0.05, its weakest link in three months, Reuters data showed. (Graphic: r.reuters.com/vuw93s )
The gold-equities correlation is on track to turn positive, after the two were moving in tandem earlier this year.
Other precious metals and commodities benefited from a 2 percent drop of the dollar against the euro, its largest one-day decline in 15 months.
PAULSON LOST MORE IN SEPT, SEEN BULLISH
Bullion traders also said news that hedge fund manager John Paulson lost more money in September showed the correction in gold may have run its course.
Disappointing performance at Paulson & Co suggests the firm could have liquidated some of its gold investments to meet margin calls amid losses in other markets back in September, traders said.
Steadier gold prices suggest the heaviest bouts of liquidation might have already ended, they said.
Paulson's flagship Advantage Plus fund, which uses some borrowed money to help boost returns, tumbled 19.35 percent last month the firm told clients.
His gold fund, which includes metal and mining companies, lost 16.35 percent last month and trimmed its year-to-date gain to 1.34 percent.
Gold prices have been choppy since falling as much as 20 percent from the record highs hit early in September.
Among platinum group metals, spot platinum was up 2.3 percent at $1,520.49 an ounce, while spot palladium was up 4.4 percent at $608.73 an ounce.
(Additional reporting by Rujun Shen in Singapore; Editing by Andrea Evans and Sofina Mirza-Reid)