* Rallying crude, grain prices boost gold, silver
* Precious metals hold gains after Fed minutes
* Physical gold demand emerges after price dip
* Coming up: U.S. weekly initial jobless claims Thursday
(Rewrites, adds comments, link to graphic)
By Frank Tang
NEW YORK, May 18 (Reuters) - Gold rose and silver surged 3 percent on Wednesday, as rallying grain and crude oil prices and lingering worries about a European debt crisis lifted precious metals in a commodity rally.
Bullion is now heading for its biggest one-day gain in over a week, snapping a three-session losing streak. Trading volume, however, was quieter than usual, a sign that funds were less active participants following a sharp sell-off.
"Some of the recent selling may have been overdone. It was too much a reaction to the negatives in worldwide economic growth, said Michael Cuggino, portfolio manager of Permanent Portfolio Funds with about $12.5 billion in mutual fund assets.
Cuggino said that longer-term investors might be coming back to the precious metals market after hot money had exited the commodities sector during the sell-off.
Spot gold
Gold and silver prices largely held onto their early gains even as minutes of the Federal Reserve's April meeting showed most Fed officials prefer to raise benchmark interest rates before selling assets when the time comes to tighten policy. [ID:nN18279205]
The Reuters-Jefferies CRB index <.CRB>, a global benchmark for commodities, was set for its biggest gain in two months as buyers emerged for oil and other raw materials cheapened by the sell-off of the last fortnight.
U.S. grain prices soared on harsh weather and crude futures rose about 3 percent, while the S&P 500 index was higher after three straight days of losses. [GRA/] [O/R] [.N]
Silver
COMEX gold and silver futures volume was sharply below their 30-day norms again, reversing a trend of heavier turnover during recent sell-offs.
"The funds are more cautious as far as commodities are concerned. The CFTC data across the board indicates there's been fund liquidation so there is less participation there," said Bill O'Nell, partner of commodities investment firm LOGIC Advisors.
"Very often, at the end of a sell-off period, you'll see a quieter market and then it builds up momentum again," O'Neill said.
Silver has outperformed gold for a second day, bringing the gold/silver ratio -- which shows how many ounces of silver an ounce of gold can buy -- to 43 Wednesday from near 45 on Monday.
ASIAN PHYSICAL DEMAND RISES
Gold prices are still down over 4 percent this month, with investor sentiment towards the precious metal turning more cautious as gold holders worried it may struggle to rise significantly after hitting record highs this month.
(Graphic on gold, commods performance: http://r.reuters.com/nab49r )
Consumer demand has materialized with gold's three-session slide earlier this week due to weak factory and housing data combined with disappointing corporate earnings.
Premiums for gold bars in Asia increased slightly from a week earlier, as buyers from China and elsewhere in the region took advantage of a dip in prices to buy physical materials. [GOL/AS]
Also providing safe-haven demand to gold was a warning by the International Monetary Fund that Greece would fail to shore up its finances unless it redoubled reform efforts, and euro zone officials dismissed suggestions that a mild debt restructuring might help. [ID:nLDE74H13X]
INFLATION, INTEREST RATES IN FOCUS
Precious metals also benefited as investors turned their focus on rising inflationary expectations.
Impetus for higher interest rates is fading on the Bank of England, which decided to keep rates at 0.5 percent, as policymakers are torn between weak growth and surging inflation. [ID:nLDE74H0VM]
Also, Canadian wholesale trade volumes rose in March, providing further evidence of what appears to be stronger-than-expected first-quarter economic growth, while April's leading indicator suggested the strength may persist.
Among other precious metals, platinum
Palladium prices have risen 4 percent so far this week after a bullish
industry report by PGM specialist Johnson Matthey Plc
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US gold