Gold edged higher on Monday, as investors found value after a two-day slide caused by heightened concerns the U.S. central bank could start tapering its monetary stimulus, but gains were held back by a rocketing dollar.

Bullion has fallen 10 percent since Federal Reserve Chairman Ben Bernanke said last month the U.S. economy was recovering strongly enough for the $85 billion monthly bond buying stimulus to be reduced later this year.

The tapering would support a rise in interest rates and bolster the dollar, making gold less attractive.

Data on Friday showed that U.S. employers added 195,000 new jobs to their nonfarm payrolls last month, indicating that the improvement in the jobs market remains on track.

"We had a good NFP number on Friday but the unemployment rate remains unchanged at 7.6 percent and it is not a done deal that the Fed will start tapering its bond-buying in September," Peter Fertig of Quantative Commodity Reaserch said.

"But one development will take place over the medium run and that is the strengthening of the dollar against major currencies."

Spot gold was up 0.3 percent to $1,226.70 an ounce by 0944 GMT. Comex gold futures for August rose $12.60 to $1,225.10.

Prices fell two percent on Friday after the U.S. jobs report and analysts expect further declines as the economy improves.

"Gold may move lower as the implications of nonfarm payrolls are digested," Mitsubishi said in a note.

"However the depth of the selling seen already may mean there is a short-term rally as physical buying and short covering emerges once again."

Gold posted its biggest quarterly loss on record, down 23 percent for April-June, and fell to $1,180.70 for the first time in nearly three years on June 28.

On Monday the U.S. dollar rose 1.5 percent and hit a fresh three-year high against a basket of major currencies.

European shares rebounded, after Friday's drop, on news that Portugal's political parties agreed to end a rift that had threatened the country's bailout programme, while Greece looked close to securing its next tranche of aid.

 

FURTHER DECLINES

Sentiment remained guarded, with continued liquidation from gold-backed exchange-traded funds signalling that interest in the metal was waning.

Holdings of the world's largest gold-backed exchange-traded fund, SPDR Gold Trust, fell 0.3 percent to 30.92 million ounces on Friday, hitting fresh lows since February 2009.

Analysts said that further declines in the gold price were possible.

"We're predicting gold will continue to drop year after year roughly by $100 on average each year," Michael Haigh, managing director at Societe Generale, told reporters in Singapore.

Silver rose 0.5 percent to $18.96 an ounce, having lost 3.6 percent in the previous session. Platinum gained 0.5 percent to $1,331.24 an ounce, also helped by news of renewed strike disruptions in the world's largest supplier, South Africa.

Palladium dropped 0.3 percent to $676.47 an ounce. (Additional reporting by A. Ananthalakshmi in Singapore; Editing by Anthony Barker)