Gold hit six-week highs on Monday as the euro recovered against the dollar and other commodities climbed, with confidence in the precious metal rising after it recorded three straight weeks of gains for the first time since November.
Gold prices have risen by some 7.0 percent since the end of December, but analysts warned the metal could lose traction if more bad news on the euro zone knocks the euro lower versus the dollar.
Spot gold was up 1.1 percent at $1,675.99 an ounce at 1550 GMT, having earlier hit a high of $1,677.10. U.S. gold futures for February delivery were up $12.5 an ounce at $1,676.3.
Gold is part of a wider rally in commodities and risk appetite, Daniel Smith, analyst at Standard Chartered said.
Gold has done pretty well since hitting the lows back in late December. I felt it would rally because it just seemed oversold to me and obviously we have seen some kind of upturn from the physical side of things, which has helped ... I think we will get to $1,700 and then maybe get a bit more consolidation, he said.
The euro traded at a near three-week high against the dollar on Monday as a squeeze on short positions added to last week's momentum, signaling that markets had become cautiously optimistic that Greece can cut a deal on a key debt swap.
Germany and France pressed on Monday for a rapid deal between Greece and its private creditors that returns its soaring debt to sustainable levels and said they remained committed to a new bailout that is needed by March to avert a disastrous default.
Despite this, prices of raw materials like crude oil and key industrial metals firmed on Monday. Brent crude rose by more than $1 a barrel and copper gained 1.7 percent.
U.S. stocks were little changed in early trading on Monday after equities posted their best week in a month as the euro zone debt crisis and the U.S. economy showed signs of stabilizing. .N
Safe-haven German Bund futures fell on Monday, along with U.S. Treasury prices.
CHINESE GOLD BUYERS TAKE A HOLIDAY
Money managers, including hedge funds and other large speculators, raised bullish bets on gold to a one-month high at 116,978 lots, while they boosted their exposure in silver to the highest level since late November 2011, data from the U.S. Commodity Futures Trading Commission showed.
The slow grind higher in gold speculative positioning on Comex reflects the cautious optimism that appears to dominate market sentiment at the moment, said UBS in a note.
That investors have become friendlier to gold is clear, but as gold's correlation with risk and the euro remains strongly positive - although easing somewhat - longs are likely to remain more tentative than aggressive given the still-uncertain macroeconomic environment.
On the physical side of the market, Indian gold demand firmed as the stronger rupee increased local buyers' purchasing power for the dollar-priced metal.
Volumes were light elsewhere as markets closed in China - the world's number two gold consumer - Singapore, Malaysia and Indonesia for the Lunar New Year break.
Silver was up 0.8 percent at $32.40 an ounce, tracking gains in gold. Spot platinum was up 1.3 percent at $1,550.00 an ounce, while spot palladium was up 1.0 percent at $680.50 an ounce.
The platinum/palladium ratio - the number of palladium ounces needed to buy an ounce of platinum - held near its lowest since early January on Monday at 2.26, having fallen from the one-year high it hit in late November at 2.71.
Palladium outperformed platinum, partly owing to comments from Norilsk Nickel's CEO that the company will reduce production this year due to a slight fall in global metal demand, said Morgan Stanley in a note.