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A day before Japan starts its Golden Week holidays, central bank Governor Haruhiko Kuroda has handed a surprise present to bullion investors.
Kuroda and his colleagues opted against a widely expected monetary stimulus Thursday, boosting the yen, hurting the greenback and putting gold on course for its longest run of gains since February.
The Bloomberg Dollar Spot Index fell as much as 1.1 percent, the biggest drop since March 17, boosting demand for gold as an alternative asset.
"The Bank of Japan shocked markets by not offering further intervention, which sent the yen higher and the dollar lower, benefiting gold," said Simona Gambarini, a commodities economist at Capital Economics Ltd. in London.
The metal for immediate delivery rose as much as 1.7 percent to $1,266.65 an ounce and traded at $1,264.78 an ounce by 2 p.m. in New York, according to Bloomberg generic pricing. Before the BOJ decision, prices had been down as much as 0.6 percent, with gold jumping more than $10 in the 20 minutes following its announcement.
Gold futures for June delivery gained 1.3 percent to settle at $1,266.40 an ounce on the Comex in New York, after rallying as much as 1.5 percent.
Prices pared gains after U.S. government reports showed rising inflation and further improvements in the labor market. Federal Reserve officials on Wednesday left the door open for raising interest rates in June, indicating strong hiring and income gains have the potential to reignite consumer spending and propel economic growth.
Higher rates curb the appeal of bullion because it doesn't pay interest.
"The ultimate driver of gold is just how quickly the Fed is going to move interest rates in response to higher inflation readings and potentially more wage pressures," said Mark Heppenstall, the Horsham, Pa.-based chief investment officer of Penn Mutual Asset Management
"It's our expectations that the Fed is going to allow inflation and inflation expectations to run a little bit above the 2 percent mark before they feel the urgency to move interest rates higher."
A gauge of 14 senior global gold producers tracked by Bloomberg Intelligence headed for the highest close since March 2014. Toronto-based Barrick Gold Corp., the world's largest producer of the metal, advanced 4.8 percent.
In ETFs and other metals:
• Holdings in exchange-traded funds backed by gold rose 1.6 metric tons to 1,755.6 tons on Wednesday, data compiled by Bloomberg show.
• Spot silver climbed 1.8 percent to $17.5545 an ounce. Aggregate trading in silver futures on the Comex in New York was 63 percent above the 100-day average for this time.