Gold edged higher on Monday, supported by a retreat in the dollar as Italian political risk receded, though the prospect of another rise in US interest rates kept a lid on gains. The metal fell on Friday after stronger than expected US payrolls data shored up expectations that the Federal Reserve would press ahead with another rate hike at its June meeting.
Gold is highly sensitive to rising interest rates, which lift the opportunity cost of holding non-yielding bullion. They also boost the dollar, in which the metal is priced. Spot gold was up 0.2 percent at $1,295.21 an ounce by 1350 GMT, while US gold futures for August delivery were flat at $1,299.50 an ounce.
The interest rate cycle in the United States is outweighing other factors for the moment, said Julius Baer analyst Norbert Rucker.
"Investment demand for gold is just not strong enough to lift the price sustainably," he said. "Near term, the US interest rate hiking cycle is driving prices, and everything that goes along with that - a rising dollar, the interest rate differential with the euro zone."
The euro eroded some of last month's hefty losses to bounce 0.5 percent against the dollar on Monday as political tensions eased in Italy.
Stock markets also strengthened as worries over a potential trade war between the United States and other major economies was overshadowed by a retreat in political risk in Europe and strong US jobs data.
Finance leaders of the closest US allies vented anger over the Trump administration's metal import tariffs on Saturday. Gold has struggled to capitalise on the trade stand-off, however, with attention shifting to the outlook for US interest rates.
Speculators raised their net long position in COMEX gold contracts to the strongest level since late April in the week to May 29, at 61,235, US Commodity Futures Trading Commission (CFTC) data showed on Friday.
However, gold-backed exchange-traded funds registered outflows later in the week, suggesting that investment appetite was softening. Holdings of the largest gold ETF, US-listed SPDR Gold Shares, fell by 10.6 tonnes on Friday, its biggest one-day outflow in nearly four months.
Among other precious metals, silver was up 0.8 percent at $16.48 an ounce, while platinum was also 0.8 higher percent at $906.30 and palladium was up 0.6 percent at $1,004.97.
Money manager short positions, or bets on falling prices, on CME platinum contracts hit record highs in the week to last Tuesday, ING said in a note.
"Open interest continued to rise as prices fell last week, suggesting the shorting continues, but at these levels we would soon expect some support from short-covering/profit-taking," it said.