Gold rose more than 1 percent Monday as the dollar fell versus the euro after France and Germany pledged to strike a proposal to recapitalize euro zone banks, while traders remained cautious ahead of further details of the plan.

German Chancellor Angela Merkel and French President Nicolas Sarkozy said after talks on Sunday that they aimed to come up with a sustainable answer for Greece's debt problems and agree how to recapitalize European banks.

Spot gold was up 1.4 percent at $1,659.80 an ounce at 0915 GMT. Prices of the precious metal have been choppy since they plunged as much as 20 percent in September from the record highs they hit early in the month.

Strong physical demand after Friday's price decline and as Chinese buyers returned to the market after a week-long holiday also helped support prices, as did worries that the latest plan to tackle the euro zone debt crisis could prove short-lived.

At the moment, near-term direction does look very, very mixed, but on a longer term view, you still have to be positive given what we are seeing coming out of the physical markets, particularly in Asia, said Credit Agricole analyst Robin Bhar.

Clearly (recent) very extreme volatility called into question gold's role as a safe haven, which should be characterized by low risk and low volatility, he added. But as a form of insurance (it is attractive).

People are thinking the newsflow is only beneficial in the short term. Europe still has to get its act together on a much longer-term basis.

Unusually for an asset that usually benefits from losses in assets seen as higher risk, like stocks, gold climbed along with equity markets on Monday. European shares were lifted by the Franco-German plan to tackle the debt crisis. .EU

The fillip lent to risk appetite by the proposal also lifted the euro 1 percent versus the dollar, while oil climbed. A weaker dollar tends to benefit gold, as it makes dollar-priced commodities cheaper for other currency holders.

France's Sarkozy said he and Merkel were in total agreement on the recapitalization of European banks, even though officials in Paris and Berlin have made clear in recent days that the countries are far apart.

While a detailed plan was lacking, we view any progress on bank recapitalization as a positive for gold, said UBS in a note. Typically liquidity concerns and funding issues are not gold's friends.

U.S. gold futures for December delivery were up $24.80 an ounce at $1,660.60.


Data released by the U.S. Commodity Futures Trading Commission on Friday showed money managers, including hedge funds and other large speculators, scaled back bullish bets in gold futures and options for the eighth time in nine weeks.

China's financial markets reopened after the week-long National Day holiday. The popular gold forward contract on the Shanghai Gold Exchange rose more than 1 percent to 341.90 yuan per gram, or $1,674.50 an ounce.

The decline in gold prices recently has attracted retail interest as China's Golden Week holiday draws to an end, said HSBC in a note.

Dennis Lau, director of sales operations for Chow Sang Sang Holdings Intl, the largest listed jewelry maker and retailer in Hong Kong, mentioned in an interview that more gold buyers are attracted to the gold markets this year following the plunge in gold prices, it added.

Sales during Golden Week were 50 percent higher from a year earlier as buyers took advantage of the price decline. Due to positive retail buying, we remain upbeat on gold prices.

Premiums on gold bars in Hong Kong remained around $3 per ounce, as physical stockpiles were running low, said dealers.

Other precious metals also benefited from the weaker dollar, with silver up 2.2 percent at $31.83 an ounce.

Among the more industrial precious metals, spot platinum was up 1.8 percent at $1,512.49 an ounce, while spot palladium was up 4.1 percent at $606.85 an ounce.