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Singapore - Gold jumped nearly 1% on Monday, bolstered by safe-haven bids following rising geopolitical tensions in the Middle East that knocked equities and the dollar lower.
Saudi Arabia cut ties with Iran on Sunday, responding to the storming of its embassy in Tehran in an escalating row between the rival Middle East powers over Riyadh's execution of a Shi'ite Muslim cleric.
Iran's top leader, Ayatollah Ali Khamenei, predicted "divine vengeance" for the execution of Sheikh Nimr al-Nimr, an outspoken opponent of the ruling Al Saudi family.
Spot gold rose 0.9% to $1 069.20 an ounce by 06:52 GMT, after earlier hitting a session high of $1 070.20. US gold futures gained 0.8%, while spot silver jumped about 1%.
"Gold is being bid up due to the risk-off sentiment in the market," said a precious metals trader in Singapore.
Asian shares and currencies fell on Monday due to tensions in the Middle East and soft Chinese data. Chinese stocks tumbled 7%, leading to a trading halt.
The dollar fell to a 10-week low against the yen, also seen as a safe haven, and slipped from a two-week high against a basket of major currencies. A weaker dollar makes gold cheaper for holders of other currencies.
Brent crude and WTI rose about 2% on Monday due to the fallout in the Middle East. Higher oil prices support bullion, as gold is seen as a hedge against oil-led inflation.
Investors bet on gold as an alternative investment during times of geopolitical and financial uncertainties, though safe-haven rallies typically tend to be short-lived.
After losing 10% last year, gold faces another tough year in 2016, amidst higher US interest rates and a stronger dollar, with analysts predicting further price drops.
The Federal Reserve raised US rates for the first time in December, and is expected to resort to gradual increases in this year. Higher rates dent demand for non-interest-paying gold, while supporting the dollar.
"Even though the rate hike would be gradual, the dollar is going to stay firm. That is going to drag gold prices down," said OCBC analyst Barnabas Gan, who expects gold to drop to $950 an ounce this year.
In a reflection of bearish investor sentiment, assets of SPDR Gold Trust, the top gold-backed exchange-traded fund, fell 0.18% to 642.37 tonnes on Thursday, close to a seven-year low.
