NEW YORK/LONDON (Reuters) - Silver rallied more than 4 percent on Tuesday after it breached key technical resistance and gold prices raced toward $1,800 an ounce a day before the European Central Bank will offer cheap loans to banks.
Bullion rose to a three-month high as markets focused on economic uncertainty driven by an upcoming ECB move to offer another half a trillion euros of low interest three-year loans to banks and companies in need of investment funds.
Silver hit a five-month high and its rally quickened pace after it broke above recent highs near $35.70, a resistance that had failed to breach several times since September.
"Both gold and silver are lifted by an expectation of continued liquidity coming into the market," said Frank McGhee, head precious metals trader at Integrated Brokerage Services
"Massive fund buying and predominantly technical factors boosted silver, which was undervalued compared to everything else and we are covering a lot of the ground today," he said.
Spot gold was up 0.8 percent at $1,780.20 an ounce, having hit a fresh three-month high of $1,789.40.
U.S. gold futures for April delivery settled up $13.50 an ounce at $1,788.40, with trading volume about 20 percent below its 30-day average, preliminary Reuters data showed.
Silver rose 4.1 percent to $36.80 an ounce by 11:31 a.m. EST (1631 GMT), having hit a high of $37.21, its loftiest since September 22.
Silver is by far the best-performing precious metal this year with a 32 percent gain. Last year, it posted a 10 percent loss after prices corrected sharply from a record near $50 an ounce set in April.
On weekly charts, silver was poised to breach $35.66 an ounce, where the channel top converged with the major double-bottom neckline, said CitiFX strategist Tom Fitzpatrick. A close above that resistance would confirm a break, suggesting a test of $45, up 25 percent from current levels.
Graphic: Silver breakout r.reuters.com/gac86s
Some investors also bought silver as it appeared cheaper relative to gold. The gold/silver ratio, or the number of silver ounces needed to buy an ounce of gold, dropped to 48, its lowest since mid-September.
Strong investment buying also helped. Holdings of the world's largest silver exchange-traded fund rose 22.7 tonnes on Monday, and are up 109.8 tonnes since the beginning of the year. In the same period of 2011, they fell 255.2 tonnes.
Gold rallied as the euro rose 0.5 percent versus the dollar ahead of an expected cash injection of 500 billion euros from the ECB on Wednesday. The move is seen as buying more time for policymakers to sort out the sovereign debt crisis.
"Gold and silver have been trending up in the last several weeks on continued loose monetary policies from the Fed and the world central banks," said Michael Cuggino, portfolio manager of the Permanent Portfolio Funds with $17 billion in assets.
Cuggino said he did not focus on Tuesday's short-term rally, and added that U.S. economic growth and easy money should boost industrial metals such as silver and platinum in longer run.
Other analysts say with much euro-positive news now largely priced into the market, gold may struggle to rally as it has so far struggled to maintain traction above $1,780 an ounce.
Deutsche Bank analyst Daniel Brebner said markets were well aware of ECB's easy monetary stance, which was unlikely to drive gold prices up further.
In other precious metals, spot platinum was up 0.4 percent at $1,708.99 an ounce, while spot palladium was up 2.2 percent at $716.97 an ounce.
Editing by Bob Burgdorfer