LONDON Gold prices were on course for their biggest monthly rise since August on Tuesday, boosted by economic unease in Europe and the United States and raising the possibility of a climb toward last year's record high of just over $1,900 per ounce.
Sentiment for gold at the end of January compares starkly with late December, when prices dropped by more than 10 percent in their biggest monthly fall since the collapse of Lehman Brothers in an investor dash for cash.
A $400 price drop from last September's record $1,920.30 had left investors questioning whether gold had ended an 11-year rally.
Gold was up 0.8 percent at $1,742.59 an ounce by 1523 GMT, having earlier touched $1,747.39 - its highest since mid-December and up some 11 percent on the month to date.
Currency fundamentals turned against the market, with the euro knocked by weaker-than-expected U.S. consumer confidence. A stronger dollar makes gold dearer for holders of other currencies.
But the surprisingly weaker U.S. data, concerns that Portugal could follow a similar path to Greece plus figures pointing to a poor first quarter in the euro zone were supportive for gold.
More broadly, bullion was benefitting from a favorable monetary policy backdrop, with a jump of almost 5 percent last week after the U.S. Federal Reserve pledged to keep interest rates near zero until at least late 2014.
"There's been a lot of money put to work here during January. Gold was at the beginning of the year one of the few commodities that everyone felt would be a good performer and people have been investing accordingly," said Ole Hansen, senior manager at Saxo bank.
"After the big sell-off we had, there was a lot of nervousness heading into the last quarter. But the decisive move we've had, especially over the last week or so, has removed some of that worry," Hansen said, adding that any correction would be met by buyers.
A top U.S. Federal Reserve official said on Monday he would have preferred a more optimistic statement on the U.S. economy, after the central bank painted a grim picture of the recovery last week and forecast ultra-low interest rates.
PORTUGAL YIELDS BREACH 17 PERCENT
Portuguese bond yields have soared to levels that show markets expect the country will be unable to repay its debts without more bailout cash and will follow Greece in asking bondholders to stomach losses on their investments.
Ten-year Portuguese bond yields hit a euro-era high of more than 17 percent on Monday, matching levels seen in Greece five months ago.
"With gold starting 2012 at a cracking pace ... gold may be poised to set fresh highs this year but much earlier than many - ourselves included - would have expected." Ross Norman, chief executive of Sharps Pixley, said in a note.
Gold has gained for the last four weeks, with a spike in prices before the Lunar New Year holidays being driven partly by Chinese buying.
The most active U.S. April gold contract rose $13.40 an ounce to $1,744.40 an ounce.
Greece and its private creditors realize the need for it to avert a financial collapse and are close to a deal on restructuring Greek sovereign debt, Luxembourg Finance Minister Luc Frieden said on Tuesday.
Silver added 1 percent to trade at $33.79 an ounce after rising to $34.08, its strongest since mid-November. Platinum and palladium also firmed.
Holdings of the world's largest silver-backed exchange-traded fund, iShares Silver Trust (SLV.P) rose about 1 percent to 9,608.95 tonnes by Monday, from 9,510.70 tonnes on Friday.
Traders and investors were also watching for further developments at South African miner Impala Platinum (IMPJ.J). It said on Monday its Rustenburg operations remained shut after the majority of workers staging an illegal strike over wages failed to return to work.
(Additional reporting by Lewa Pardomuan in SINGAPORE; Editing by Anthony Barker)