Gold prices inched up on Monday as the US dollar weakened, prompting investors to buy back gold after it lost 2 per cent late last week when optimism about the economy reduced bullion's safe-haven appeal.
Spot gold earlier fell to its lowest since May 28 of $US951.50 per ounce. But it was up 0.4 per cent at $958.90 per ounce in afternoon trade, compared with New York's notional close of $US955.30 on Friday.
US gold futures for August delivery trimmed earlier losses of about 0.7 per cent and were down 0.3 per cent at $US960.10 an ounce, compared with $US962.60 an ounce on the COMEX division of the New York Mercantile Exchange.
"Gold is becoming a bit top-heavy, as investors find fewer reasons to buy when stocks are rising and the dollar is rebounding," said Tetsu Emori, a fund manager at Tokyo-based Astmax Co Ltd.
"Funds including trend-following CTAs were buying gold as the market was rallying, and if the market becomes top-heavy, they will start to look for the moment to cut losses," he said.
Bullion came under pressure on Friday as the US dollar posted its largest one-day gain against a basket of currencies in more than five months after US jobs data raised hopes for an economic recovery.
Still, a rise in the US dollar could also benefit gold if such a rise were prompted by investor risk aversion.
Gold approached the key $US1000 level last week, bolstered by talk of systemic risk in the US dollar, including worries about rising inflation due to huge US government spending and a ballooning budget deficit. Gold often benefits as a hedge against falling value in dollar-denominated assets.
Emori said the US dollar's recent rise was likely to be a short-term unwinding of short positions in the greenback and long positions in other currencies, and that the dollar would likely resume its weakening trend as risk appetite returns along with improving sentiment towards the economy.
But if US dollar short-covering continues and pushes gold prices down to levels where funds had begun buying in the recent rally, gold could extend losses as those funds would have to cut losses, Emori said.
With the gold market losing momentum to test the $US1,000 mark, investment in gold-backed exchange-traded funds also slowed.
The world's largest gold-backed exchange-traded fund, the SPDR Gold Trust, said holdings totalled 1132.15 tonnes as of June 5, down 0.35 tonnes from the previous business day.
