By Clara Denina and Pratima Desai
LONDON (Reuters) - Gold surged more than 4 percent on Thursday to its highest in a year as fears about financial uncertainty, a lower dollar and U.S. Treasury yields persuaded investors to seek refuge in the precious metal.
Traders said financial instability fears were fueled by European bank shares slumping to multi-year lows, with concerns mounting over banks' profitability in a low-growth and low-interest rate environment.
Spot gold <XAU=> jumped to $1,247.98 an ounce, its highest since February 2015, and was up 4.1 percent at $1,246.6 at 11.10 a.m. ET. It is on track for its biggest daily rise since Sept 2013.
"The safe-haven seekers are moving back. We recommend clients add gold to their portfolios as insurance, if things turn out really bad, there will be much more upside," said Julius Baer analyst Carsten Menke.
"Look at the massive inflows into ETFs (Exchange Traded Funds) this year. They put the price recovery on a much more solid footing than any of the other recoveries we've seen over the past couple of years."
Gold's downward trajectory started in May 2013 when former Federal Reserve Chairman Ben Bernanke first mentioned tapering or reducing monthly bond purchases and markets started to think about eventual higher U.S. rates.
But expectations about the pace of U.S. rate rises and the magnitude have been scaled back. This has been reinforced by Fed Chair Janet Yellen saying tighter credit markets, volatile financial markets, and uncertainty over Chinese economic growth had raised risks to the U.S. economy.
Holdings of the largest gold-backed exchange-traded-fund (ETF), New York's SPDR Gold Trust have jumped more than 9 percent to more than 22.57 million ounces. <HLDSPDRGT=XAU>
The benchmark 10-year U.S. Treasury yield (US10YT=RR) fell to lows last seen at the end of 2012 when the Fed was busily printing money as investors piled into assets used to hedge against economic and financial uncertainty.
Gold option volatility surged to the highest in more than a year as investors have placed new bullish bets that prices will extend their recent rally.
"Investors are returning to gold as a core diversifier and safe haven investment," James Butterfill, head of research at ETF Securities, said in a note. "Given the increasingly challenging investment and economic environment, we expect this trend to continue."
Silver rose 2.9 percent to $15.72 an ounce, its highest since November 2015.
Spot platinum <XPT=> climbed 2.75 percent to $957.86 while palladium <XPD=> rose 0.1 percent to $520.47.