Gold jumped 2 percent on Monday as trading for the third quarter opened, but traders were doubtful about near-term strength over continuous worries about a pullback of U.S. stimulus measures that caused bullion's record drop in the previous quarter.
The dollar fell against most currencies as better-than-expected manufacturing data from Europe and Japan provided relief to gold and other risky assets that have recently sold off with the prospect of reduced stimulus measures from the Federal Reserve.
Investor confidence in gold - which fell a record 23 percent in the second quarter - has been eroded by rising talk of an end to the Fed's ultra-loose monetary policy, which would support a rise in interest rates, making the shiny metal less attractive.
Spot gold hovered at around $1,234 an ounce by 11:50 EDT (1550 GMT). It had surged 2.2 percent earlier to a session peak of $1,260.61, well above the near three-year low of $1,180.71 on Friday on speculation the Fed will rein in its $85 billion monthly bond purchase programme.
Comex gold futures for August delivery were up 2.6 percent at $1,254.70. Andrey Kryuchenkov, an analyst at VTB Capital, said the bounce was an expected reaction to the retreat last week.
"I don't think it's sustainable while volumes remain relatively low," Kryuchenkov said.
Traders and investors are awaiting U.S. payrolls report for June, due on Friday, for a better indication of how gold and other assets would perform. A strong payrolls reading would likely signal more pressure on the Fed to reduce its stimulus, lifting Treasury yields and the dollar, and depressing gold. Markets are also watching the European Central Bank's policy meeting on Thursday, which is likely to emphasise that the euro zone economy is in a different stage of recovery than the United States.
"I doubt there will be a lot of bargain hunting given a whole array of macro numbers this week, including the ECB statement (and with) non-farms in focus," VTB Capital's Kryuchenkov said. "The market is putting extra weight on U.S. economic releases."
ETF HOLDINGS DROP
The amount of bullion held by exchange-traded funds (ETFs) in gold have fallen this year, with outflows exacerbated by the recent price tumble. Divestment from the largest gold ETF, SPDR Gold Trust, stand at nearly 13 million ounces this year. Hedge funds and money managers have also slashed their bullish bets in gold futures and options to their lowest levels in six years, a report by the Commodity Futures Trading Commission showed on Friday. The low prices of the past few weeks have subdued physical demand for gold in Asia, traditionally the largest buyer of the commodity. Asian consumption of gold had helped limit some of bullion's losses when prices fell the most in 30 years in April.
"While the physical market was able to suspend the downward trajectory of gold in April following hefty disinvestment, this time, preliminary data suggest a much weaker physical market footing," Barclays analysts said in a note.
The bank cut its 2013 price forecast to $1,393 an ounce from $1,483. Sales of American Eagle gold bullion coins plunged to 57,000 ounces in June, the lowest since August last year, as physical demand from retail investors and collectors sank. The spot price of silver was up 0.4 percent at $19.68 an ounce. It reached a near three-year low at $18.19 in the previous session. Platinum rose 2.8 percent to $1,376.49 an ounce and palladium jumped 3.8 percent to $680.72 an ounce.
(By Barani Krishnan and Clara Denina. Additional reporting by Jan Harvey in London; Editing by Grant McCool)