Security concerns and a sharp drop in the dollar helped gold hit its highest level in nearly two weeks on Monday, but investors were expected to trade cautiously ahead of the U.S. Independence Day holiday.

Gold rose as high as $658.80 an ounce, the highest since June 20, and was quoted at $656.80/658.30 at 3:17 p.m. EDT (1917 GMT), against $648.70/$650.20 in New York late on Friday and last week's three-month low of $638.90.

Most-active gold for August delivery on the COMEX division of the New York Mercantile Exchange settled up $8.30, or 1.3 percent, at $659.20 an ounce, after dealing between $650.60 and $661.30.

Certainly it's the dollar. Certainly it's the heightened threat of terrorism again after the incidence in England and Scotland, said Leonard Kaplan, president at Prospector Asset Management.

Kaplan said that trading was quiet on Monday, and that small buying could push prices up strongly. The U.S. financial markets will be closed on Wednesday for the Independence Day holiday.

He also said that shorts covered their open positions on the back of security fears on Monday. Kaplan also said gold futures did not break above significant resistance of $660 to 665 an ounce.

Security fears came to the fore again after Britain raised its security rating to its highest level of critical -- meaning an attack is believed to be imminent -- after failed car-bombing attempts in London and an attack on a Scottish airport.

Gold is often used as a hedge against global economic and geopolitical uncertainty and oil-led inflation, while a lower U.S. currency makes dollar-denominated metals cheaper for investors based outside the United States.

Although physical demand will improve from September onwards, conditions will be slack in the coming weeks and gold is likely to find itself dictated to in some measure by currency movements, SG Corporate and Investment Banking said.

The dollar tumbled to a 26-year low against sterling and also fell to within half a cent of a record low against the euro.

Analysts said physical gold demand was likely to slow down in the northern hemisphere summer as the period is seasonally less active because of more spending on travel and the monsoon season in India, the world's largest consumer.

We believe that $650 is a neutral territory for gold at the moment ... But with physical demand light for seasonal reasons, one of the two pillars of our argument for higher gold prices is currently not present in the market, said John Reade, head of metals strategy at UBS Investment Bank.

We continue to expect gold to trade higher in the balance of 2007 but without the support from strong price-elastic demand, we suspect gold will languish in the next month or so. We will only turn tactically bullish on gold if speculators amass decent-sized short positions, he said in a daily note.

Last week, speculators slashed their net long, or bullish bets, in U.S. gold to 9.03 million ounces, the lowest since October 2006.

In mining news, the three largest gold firms in South Africa, the world's biggest producer of the precious metal, offered workers a 6 percent wage hike on Monday.

Palladium was at $366/369, up from its previous finish of $362.50/366.50 an ounce in New York, while silver rose to $12.63/12.68 an ounce from $12.36/12.41 late in the U.S. market on Friday.

Platinum was at $1,278/1,282 an ounce, up $8 from its Friday's close in New York.

(Additional reporting by Frank Tang in New York)