Portugal bank worry drives gold to 3-1/2 month high, more upside seen

Gold surged to 3-1/2 month highs on safe-haven buying on Thursday after questions raised about the health of Portugal's top-listed bank sparked worry that a new euro zone banking crisis might be in the offing.

The scrutiny over Portugal's Banco Espirito Santo turned financial markets risk averse, with stocks on both Wall Street and in Europe ending lower. The yen, another safe-haven like gold, hit multimonth highs.

"We did have a strong gold rally during the last period of sovereign risk in Europe, so it's not surprising to see the market reacting like this," said James Steel, metals analyst and senior vice-president at HSBC in New York.

"But to be fair, gold has been trending higher for a while now and there aren't too many sellers to stand in the way with the geopolitical crises of the Middle East and Europe and the Fed's insistence that higher US rates are still way off."

At 5:00 pm EDT (2100 GMT), the spot price of bullion was up 0.7% at $1,334.91 an ounce, after racing earlier to $1,345.00, its highest since March 19. Gold technical analysts said the rally was aided partly by a breakthrough of strong chart resistance at $1,334.

US gold futures most active contract, for August delivery, settled up 1.1% at $1,339.20 an ounce.

Some traders saw more upside for the market.

"I think the path of least resistance for gold is upward, toward the mid $1,400 level," said Adam Sarhan at New York's Sarhan Capital.

Espirito Santo Financial Group, the largest shareholder in Portugal's Banco Espirito Santo, suspended trading in its shares and bonds, citing "material difficulties" at parent company ESI. It was the first significant episode of contagion for European peripheral markets this year, and it curbed demand at Greece's second debt sale following its 2012 default.

Gold also gained support from India's decision to keep the import duty on gold unchanged at a record 10% in its budget on Thursday. India's most-traded August gold contract rose as much as 3% on speculation that Indian jewellers, who were on the sidelines expecting a duty cut, will re-stock after the government's decision.

Other precious metals jumped too, with platinum group metals setting multimonth highs.

Platinum, boosted lately by more demand for the autocatalyst metal from carmakers and also by supply problems in major producer South Africa, was up 0.8% at $1,508 an ounce. It touched $1,518.25 earlier, a high since Sept. 4.

Palladium was up 0.1% at $869.20 an ounce, rising for a 14th session in a row. The sister metal to platinum peaked earlier at $875.60, the highest since February 2001.