Gold surged 2.4 percent in European trade on Monday as a sharp fall in the dollar and stronger oil prices ignited fresh buying by investors. Fears that a week-long cease-fire in the Middle East might unravel also supported the metal seen as a safe haven from riskier investments, dealers said.
Spot bullion hit a high of $626.40 an ounce before easing to $624.20/625.00 by 1423 GMT, against $611.80/612.60 in New York late on Friday, when it dropped to a three-week low of $607 on speculative selling.
"The buying seems to be mostly short covering in nature, triggered by the drop in the dollar and the rally in crude prices," said James Steel, precious metals analyst at HSBC Bank.
"It spiked early but we haven't seen any follow-through buying since then," he said, adding the market was likely to remain choppy in the near term.
The dollar weakened across the board, hitting a two-month low against the euro as investors shunned the currency amid mounting evidence that the US economy was slowing.
Gold generally rises with a drop in the dollar as the metal become cheaper for holders of other currencies.
Oil rose to almost $72 a barrel as Iran's supreme leader said the Islamic Republic would press on with its nuclear work, implying it would not heed a UN demand to stop enriching uranium. The row has raised concern of disruption to oil flows from the world's fourth-largest exporter.
Higher oil prices support gold because the precious metal is often used as a hedge against inflation.
German Chancellor Angela Merkel described the situation in Lebanon as "very fragile" as a truce between Israel and Lebanese Hizbollah guerrillas entered its second week.
David Holmes, director of precious metals sales at Dresdner Kleinwort Investment Bank, said: "Gold had a quite nice turnaround from Friday's lows, to a large extent driven by the recovery in oil prices and geopolitical concerns.
"Friday's sellers were this morning's buyers. If oil continues to make progress on the upside, then again that's a reason to buy gold."
John Reade, precious metals analyst at UBS Investment Bank, added in a report: "We remain positively disposed to gold in the short and medium term. We believe this sell-off is overdone and has been exacerbated by low volumes.
"The dollar looks weak, oil has probably weakened too much (and) physical demand for gold picked up strongly on Friday with good interest from the Indian trade."
Dealers said global tensions and firm oil would offer support for gold, but the metal lacked strength to break free from the current $600 to $650 range.
Other precious metals tracked gold's gains.
Platinum rose to $1,230/1,235 from $1,207/1,213 in New York, while palladium was at $335/340, up from $329/334.
Silver increased to $12.36/12.46 from $12.01/12.11 in the US market.