Gold rose more than 2 percent on Monday, lifted by weakness in the dollar versus the euro after France and Germany pledged to come up with 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 they aimed to come up with a sustainable answer for Greece's debt problems and agree how to recapitalize European banks.

The news lifted European shares and the euro, but investors remained wary of aggressively buying assets seen as higher risk without firmer details of the plan.

Spot gold was up 1.7 percent at $1,665.39 an ounce at 1341 GMT, having earlier hit a high of $1,670.80. Prices of the metal have been choppy since falling as much as 20 percent in September from the record highs they hit early in the month.

The correlation has turned negative again for gold against the dollar, said VTB Capital analyst Andrey Kryuchenkov. We went from about an 80 percent monthly rolling correlation to negative.

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.

Unusually for an asset that normally benefits from losses in those seen as higher risk, like stocks, gold climbed along with equity markets on Monday. .EU

The fillip lent to risk appetite by the proposal lifted the euro 1.8 percent versus the dollar, and oil prices rose. A weaker dollar tends to benefit commodities priced in the U.S. unit, as they become 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 $32.20 an ounce at $1,668.00.


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 3 percent at $32.08 an ounce.

Among the more industrial precious metals, spot platinum was up 1.8 percent at $1,515.50 an ounce, while spot palladium was up 4.7 percent at $610.72 an ounce.