Gold rose 1 percent on Friday, breaking a four-day losing streak, as bullion moved in sync once again with riskier assets on optimism European leaders will be able to contain the region's debt crisis. Gold posted its biggest one-day gain in two weeks as Wall Street and commodities rallied after the eurozone's two biggest powers France and Germany said they would meet twice - on Sunday and Wednesday - to prevent the crisis from engulfing the entire 17-nation currency area.
The metal was 2.5 percent lower for the week, its biggest decline in four weeks, falling in tandem with riskier assets such as equities and industrial metals. Gold option volatility has increased this week as calls were bid up by funds seeking a hedge against downside risks for their futures positions amid high uncertainty about the situation in Greece and the EU.
"As the moves are getting larger again, that is definitely a sign that volatility will be coming back in the market as investors are interested in participating into gold again," said Mihir Dange, COMEX gold options floor trader for Arbitrage LLC. Spot gold was up 1.2 percent at $1,637.39 an ounce by 3:13 pm EDT (1913 GMT). US gold futures for December delivery settled up $23.20 at $1,636.10 an ounce. Volume for Friday's rally was about half of its 30-day average, consistent with the quiet trading pace of the past two weeks.
Gold has increasingly performed like a risk-linked commodity. Bullion's unusual positive correlation with the S&P 500 stock index has risen to its strongest in four months, and the metal's positive link with bellwether industrial metal copper has climbed to its tightest in almost a year. Bullion accelerated gains earlier in the session after sources at the German government said there were no serious differences between Germany and France.
"It's not surprising to see buyers begin to step in here out of concern that they would miss an opportunity for another (rally)," said Mark Luschini, chief investment strategist at broker-dealer Janney Montgomery Scott, which has $54 billion in assets under management.
However, investors remain jittery as France's push to use more European Central Bank money to fight the eurozone debt crisis ran into strong resistance from Germany and other EU partners. The metal also benefited as the dollar fell nearly 1 percent against major currencies as investors' risk appetite grew ahead of the EU summit. On charts, technical analysts said that gold remained vulnerable to a further sell-off after it broke below its 100-day average on Wednesday. Bullion will find support at sharply lower prices at below $1,600 an ounce, they said. This month, global gold ETF holdings are set for their largest net increase in three months, having risen by more than 170,000 ounces to 67.229 million ounces.
Silver, which can move in lock-step with gold but more frequently tracks base metals, notched a 3 percent decline this week. It was last up 2.5 percent at $31.26 an ounce. Palladium rose 5 percent to $612.23. The price is down 1 percent this week as concern has increased over the outlook for demand from China, which is key for car sales in the world's largest auto market. Platinum was up 1 percent at $1,506.99 an ounce.