London: Gold rallied to a 3-1/2 week high on Thursday and silver rose nearly 3 percent as escalating tensions in the Middle East knocked stocks and the dollar and drove investors into assets viewed as lower risk, such as bullion and German bonds.
European stocks tumbled 1.6 percent, the dollar fell and oil prices leapt 6 percent after Saudi Arabia and its Gulf Arab allies launched air strikes in Yemen to counter Iran-allied forces besieging the southern city of Aden.
Spot gold hit a peak of USD 1,219.40 an ounce and was up 1.2 percent at USD 1,210 at 1240 GMT.
U.S. gold for April delivery was up USD 12.20 an ounce at USD 1,208.70.
That extended a rally in gold to a seventh session, its longest winning streak since 2012. Soft U.S. data this week boosted expectations that the Federal Reserve will keep interest rates low for the time being, lifting gold.
"Overnight we have seen risk aversion because of what`s going on in the Middle East, and the dollar is weak because data has been weaker," ABN Amro analyst Georgette Boele said. "The combination of dollar weakness and risk aversion is normally one where gold should do well.
"I still believe we will see lower prices, but we need to have the environment for that, and at the moment the environment is the other way around."
Expectations that the Federal Reserve is on track to raise interest rates for the first time in nearly a decade had knocked gold to a four-month low of USD 1,142.86 this month. Higher interest rates lift the dollar and the opportunity cost of holding non-yielding bullion.
It bounced from that low, however, after the U.S. central bank sounded caution over economic growth and the pace of any rate increases after its policy meeting last week.
Investors remained cautious over gold`s outlook, with continuing outflows from SPDR Gold Trust, the world`s largest gold-backed exchange-traded fund. The fund`s holdings fell 0.2 percent to 743.21 tonnes on Wednesday.
Physical demand was also slowing, hit by the rally in prices. In China, the second-biggest gold consumer, premiums - an indication of demand - eased to about USD 2-USD 3 an ounce, compared with USD 6-USD 7 last week.
China`s gold imports from Hong Kong fell in February from the previous month, data showed on Thursday, as purchases slowed ahead of the Lunar New Year holiday.
Among other precious metals, platinum was up 1 percent at USD 1,156.49 an ounce, while palladium rose 0.6 percent to USD 766.97 an ounce.
Silver prices outperformed gold, rising 2.7 percent in early trade and reaching a three-month high at USD 17.38. It was later up 1 percent at USD 17.11 an ounce.
