Gold drifted higher in quiet trade on Monday, lifted by bargain hunting after the previous session's sharp drop, benign inflation data from China and higher commodity prices.
The metal's inflation-hedge appeal increased as U.S. soybean futures surged to a record high and corn rallied due to fears that severe dry conditions in the U.S. Midwest could lead to rising commodity inflation. Rising crude oil prices and a weaker dollar also boosted gold.
Also underpinning bullion was Chinese data showing the inflation rate undershot expectations in June, signaling more room by China's central bank to ease monetary policy to stave off a slowdown.
Traders said option trading suggested the gold price could rebound after its recent weakness due to deflation fears amid a string of disappointing economic data. The metal has lost 2 percent in the previous two sessions.
There is option activity here and volatility is being bought over. There is a big put buyer buying futures and August $1,550 puts, and that usually pertains a move up, said Jonathan Jossen, COMEX gold options floor trader.
Spot gold edged up 0.4 percent at $1,588.20 an ounce by 12:13 p.m. EDT (1613 GMT).
U.S. COMEX gold futures for August delivery were up $9.40 at $1,588.30, with volume sharply below its norm, preliminary Reuters data showed.
Silver rose 1.1. percent to $27.38 an ounce.
Gold dropped 1.5 percent on Friday after weak U.S. jobs data failed to raise hopes that the Federal Reserve will embark on a third round of asset-buying program.
San Francisco Federal Reserve Bank President John Williams said on Monday the U.S. central bank is prepared to do more to bring down unemployment that is far too high and to steer inflation back up to the Fed's 2 percent target.
Economists polled by Reuters now attach a 70 percent chance to the Fed's embarking on another round of quantitative easing or buying government bonds to lower borrowing costs. That estimate has increased from around 50 percent in late June.
CHINA'S INFLATION TAME
China's annual consumer inflation eased more than expected to 2.2 percent in June from 3.0 percent in May, creating more room for the central bank to ease policy to bolster economic growth.
The main thing that says to me is when inflation is poor, it encourages China to cut rates and stimulate the economy and I see that as good news for risk appetite, Daniel Smith, an analyst with Standard Chartered, said.
Gold carries the idea that it's a safe-haven, but in reality when everything else moves up, when liquidity improves, it tends to lift everything at the same time.
Among platinum group metals, platinum inched up 0.2 percent to $1,440.58 an ounce, while palladium rose by 1.2 percent to $579.75 an ounce.