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London - Gold started the third quarter on a strong footing to jump over 2% on Monday as technical buying and speculative short covering offset concerns that the US Federal Reserve will rein in its stimulus programme.
Prices surged 2.2% to a session peak of $1 260.61 per ounce as speculative investors raced to cover shorts and some investors snapped up bullion at what they considered bargain prices.
The market hit a near three-year low of $1 180.71 on Friday. A weaker dollar and fresh flow of institutional money on the first day of the quarter also provided support.
"Considering the past sessions, a little short covering is to be expected," said David Meger, director of metals trading at Vision Financial Markets.
Speculators increased bearish bets in bullion to their highest in three years in the week to June 25. Spot gold were up $19.92, or 1.62%, at $1 253.0/oz by 21:59.
Comex gold futures for August delivery settled at $1 255.7/oz, up $32.
Technically, bullion had moved out of oversold conditions. Its relative strength index reading was 35, up from 30 on Friday and as low as 20 a week ago. A reading under 30 indicates the market is oversold.
A slew of data from the eurozone, Japan and United States signalled a continued tentative global recovery, boosting equities, copper and oil prices.
US manufacturing expanded in June, while Japanese and European data pointed to stabilising economies.
The Institute for Supply Management said its index of national factory activity rose to 50.9 in June from 49.0 in May. That was a touch above the expected 50.5 level. Even so, it will reinforce expectations that the Fed will cut its bond buying.
After its worst quarterly performance in 45 years, gold was still firmly in a bear market - down 26% so far this year - and traders said gains were fragile. Many major investors are nursing big losses from the historic sell-off since mid-April too.
Greenlight Capital Management's offshore gold fund, run by David Einhorn, one of the most widely followed hedge fund managers, was down 11.8% in June, bringing year-to-date losses to 20%.
Investor confidence in gold - which fell a record 23% in the second quarter - has been eroded by rising talk of an end to the Fed's ultra-loose monetary policy, which would support a rise in interest rates, making the shiny metal less attractive.
Traders and investors are awaiting US payrolls report for June, due on Friday, for a better indication of how gold and other assets would perform. A strong payrolls reading would likely signal more pressure on the Fed to reduce its stimulus, lifting Treasury yields and the dollar, and depressing gold.
Markets are also watching the European Central Bank's policy meeting on Thursday, which is likely to emphasise that the eurozone economy is in a different stage of recovery than the United States.
ETF holdings drop
The amount of bullion held by exchange-traded funds (ETFs) in gold have fallen this year, with outflows exacerbated by the recent price tumble.
Divestment from the largest gold ETF, SPDR Gold Trust, stand at nearly 13 million ounces this year.
Hedge funds and money managers have also slashed their bullish bets in gold futures and options to their lowest levels in six years, a report by the Commodity Futures Trading Commission showed on Friday.
The low prices of the past few weeks have subdued physical demand for gold in Asia, traditionally the largest buyer of the commodity. Asian consumption of gold had helped limit some of bullion's losses when prices fell the most in 30 years in April.
"While the physical market was able to suspend the downward trajectory of gold in April following hefty disinvestment, this time, preliminary data suggest a much weaker physical market footing," Barclays analysts said in a note.
The bank cut its 2013 price forecast to $1 393 an ounce from $1 483. Sales of American Eagle gold bullion coins plunged to 57 000 ounces in June, the lowest since August last year, as physical demand from retail investors and collectors sank.
The spot price of silver was down 0.1% at $19.59/oz. It reached a near three-year low at $18.19 in the previous session.
Platinum rose 2.25% to $1 368.74/oz and palladium jumped 3.92% to $681.47/oz.
