Gold prices rallied on Thursday to their highest level since February on strong investment demand amid caution ahead of key U.S. non-farm payrolls data on Friday.

Bill O'Neill, managing partner of New Jersey-based LOGIC Advisors, said that asset-diversification demand for gold and other precious metals by jittery investors amid shaky equities markets propelled gold's rally.

Spot gold hit an intraday peak of $992.55, which marked the highest price since February 24. It was at $989.10 an ounce at 12:07 p.m. EDT, against $976.60 an ounce late in New York on Wednesday.

U.S. December gold futures were up $10.70 at $989.20 an ounce on the COMEX division of the New York Mercantile Exchange.

Fears that U.S. payrolls data may disappoint sparked a flight to quality among investors on Wednesday. The metal broke out of its previous $930-$960 range as a move through technical resistance above $960 sparked a rally.

VTB Capital analyst Andrey Kryuchenkov said gold's immediate move had been largely technical, with the dollar offering little support and physical demand weakening as prices rose.

Gold will need to hold its current levels to build a base for further gains, he said. If we close above $980, we will retest $990, and probably stay in this range, he said.

The dollar index <.DXY>, which measures the U.S. currency's performance against a basket of six major currencies, initially softened early on Thursday, boosting interest in gold as an alternative asset and driving prices to fresh highs.

The market was awaiting fresh clues on the economic outlook from Friday's payrolls numbers. Investors were spooked after a U.S. employment report released on Wednesday showed more private sector job losses than expected.

The data will be closely watched for its impact on the dollar, and its subsequent effect on gold. The metal is set to benefit from renewed demand if the U.S. currency slips further.

STRONG INVESTMENT

Investment demand for gold is still very strong, and that is going to help drive the price higher over time, said Helen Henton, head of commodities at Standard Chartered. We think it's going to break $1,000 by Q4, mainly driven by a weakening U.S. dollar.

Silver tracked gold higher to reach its highest level since June at $15.92 an ounce, and was at $15.84, against $15.34 on Wednesday.

It outpaced base metals such as copper, with which silver, as an industrial as well as an investment metal, often moves.

Silver has fully participated in this (rally) and yet, while base metals have picked up a bit in the last 18 hours, they were definitely on the defensive, said Stephen Briggs, an analyst at RBS Global Banking & Markets.

Silver has managed to ignore that, which is interesting.

Among other precious metals, platinum was at $1,244 an ounce against $1,229, while palladium was at $288.50 against $284.50.

Impala Platinum, the world's second largest miner of the metal, said on Thursday some workers at its operations had returned to work after a strike, but said no wage deal had been reached with the union.

(Additional reporting by Frank Tang in New York and Jane Grieve in London)

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