Gold surged 2 percent on Thursday, approaching its high for the year after the Federal Reserve launched another aggressive, bullion-friendly economic stimulus program.
The metal received a strong vote of confidence after the U.S. central bank said it would buy $40 billion of mortgage-backed debt each month until the U.S. jobs outlook improved substantially, as long as inflation remained contained.
Market watchers said the Fed's unprecedented step was essentially shifting its focus to employment from price stability, a move that was seen as very bullish for gold, a traditional inflation-hedge .
"They are emphasizing the growth mandate, and that means they don't care about inflation other than giving lip service to it," said Axel Merk, chief investment officer at Merk Funds, which has $600 million in currency mutual-fund assets.
"The price of gold will do very well in the years to come," Merk said.
Spot gold was bid at $1,765.40 an ounce as of 3:08 p.m. EDT (1758 GMT) after hitting a high of $1,772.26, within striking distance of a 2012 high of $1,790 set on February 29.
U.S. COMEX gold futures for December delivery settled up $38.40 at $1,772.10 an ounce, with trading volume poised to hit its highest level since late July and 40 percent above its 250-day average, preliminary Reuters data showed.
The flow of COMEX gold options indicated that bullion could rally further as investors scramble to buy back their previously bearish bets after the Fed announcement, said COMEX gold option floor trader Jonathan Jossen.
Silver, which tends to be more speculative and volatile than gold, rallied 3.7 percent to $34.50 an ounce.
The Fed said the new round of bond-buying was open-ended and that it would not likely raise interest rates from current rock-bottom lows until at least mid-2015. Previously, it had set such guidance at late 2014.
"The Fed's inflationary behavior should be bearish for the dollar in the long run and drive investors to seek protection via the gold market," said Jeffrey Sherman, commodities portfolio manager of DoubleLine Capital, which has more than $40 billion in assets.
QE EFFICACY DOUBTFUL
However, some question the efficacy of the Fed's monetary action. Reuters data shows that asset performance tended to diminish with each new round of QE, and it sometimes takes as long as a year for the effects of Fed action to kick in.
Year-to-date, gold is up 13 percent following a 10 percent rally since the start of August as central banks around the world appear more determined to take up further stimulus to aid a frail global economy.
That is still below the 15 percent gain seen early this year after the Fed said in January that it would keep interest rates near zero through late 2014. Doubts about additional quantitative easing (QE), or printing money to buy government bonds, had decreased bullion's appeal as an inflation hedge.
Phillip Streible, senior commodities broker at futures brokerage R.J. O'Brien, said that gold's price outlook could still disappoint as the magnitude of the new Fed stimulus was smaller than the market had expected.
Among other precious metals, spot platinum rose 2.7 percent to $1,679.99 an ounce, while spot palladium climbed 1.9 percent to $683.82.