Gold rose above $1,360 an ounce on Monday as the dollar's retreat from highs versus the euro took some pressure off prices, with a second consecutive weekly price rise underpinning investors' confidence in the metal.
Comments from European Central Bank Governing Council member Ewald Nowotny that the ECB was vehemently not turning soft on inflation also gave prices a fillip, as it suggests that price pressures remain in focus.
Spot gold was bid at $1,362.40 an ounce at 1425 GMT, against $1,356.12 late in New York on Friday. U.S. gold futures for April delivery rose $3.10 an ounce to $1,363.50.
Prices remain caught between support near $1,320 an ounce and resistance toward $1,370 as investors wait to see whether the appetite for risk that boosted higher yielding assets at gold's expense at the start of the year will be sustained.
While the market's positive outlook on gold has moderated since the beginning of 2011, we expect the metal's price to remain supported by a range of factors, said Anne-Laure Tremblay, an analyst at BNP Paribas.
These include inflationary pressures -- gold is perceived as an inflation hedge -- sovereign risk and concerns about the value of the U.S. dollar.
Confidence in the longer-term strength of gold prices was demonstrated last week by a report showing investors were beginning to build up their exposure to U.S. gold futures.
The net non-commercial position in COMEX gold futures posted its first weekly rise since early January and the largest weekly rise since early April 2010, the Commodity Futures Trading Commission said in its weekly Commitments of Traders report.
A stronger dollar limited gains in gold in earlier trade, but the metal rose as it came off highs. Dollar strength curbs the metal's appeal as an alternative asset and makes dollar-priced assets more expensive for other currency holders.
Traders awaited a raft of data, including Chinese inflation numbers and a euro zone growth report due on Tuesday, to give fresh direction to the market.
China's CPI reading for January will be released tomorrow and market chatter currently suggests it will be lower than expected, said UBS. Should CPI disappoint, this could act as a catalyst for gold to trend lower in the short term.
INVESTMENT STILL SOFT
Gold buying in India, the world's biggest consumer of the metal, was lackluster for a third day on Monday as dealers awaited further price falls.
Demand for gold-backed exchange-traded funds also remained soft, with holdings of the world's largest, New York's SPDR Gold Trust, falling by 55 tons so far this year.
Private investors, not only in the U.S. but also in Asia and Europe, clearly have a different point of view on the actual global economic and financial situation than institutional market participants, said precious metals house Heraeus.
They are still very much on the buying side, be it due to fear of inflation or worries about distortions in the international currency markets.
However, this group is not going for exchange-traded products like ETFs or certificates but for physical metal directly, it said.
Among other metals, platinum was at $1,821.80 an ounce against $1,802.50, while palladium was at $821.05 versus $811. Silver was at $30.31 an ounce versus $28.85.
The tightest physical silver supplies in four years tipped the U.S. silver futures market into backwardation last week, making near-term prices more expensive than more distant months.
Market watchers said it had been more than 10 years since silver futures were last in backwardation, a term structure associated with shortage of physical supply.