Gold hits one-week high; dollar, oil eyed

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Gold prices hit a one-week high on Monday before paring gains to trade near the previous closing price, with investors closely watching the oil and currency markets for trading cues.

Bullion prices posted the biggest one-day rise so far this month on Friday, reflecting higher oil prices and a sharp fall in the dollar as a result of disappointing U.S. housing market data.

A short-squeeze pushed prices to $1,669.26 in the early hours, but the pressure eased after the Shanghai Gold Exchange opened and the discount in Shanghai prices prompted some selling on the London market, traders said.

In the short term gold may remain under pressure from a brighter U.S. economic recovery, high real interest rates and sluggish physical demand, they said.

"There is no rush to buy gold," said Ronald Leung, a dealer at Lee Cheong Gold Dealers in Hong Kong.

"We are seeing slower economic growth accompanied by easing inflation in China, which dampens the interest in buying gold."

Prices below $1,650 may attract some buyers, albeit on a small scale, he said.

Money managers in U.S. gold futures and options cut their bullish bets for a third straight week to the weakest level in two months as bullion prices tumbled after a strong run of U.S. economic data triggered fund selling.

Spot gold was little changed at $1,663.71 an ounce by 0335 GMT, after rising more than 1 per cent last Friday and posting its first weekly gain after three straight weeks of decline. U.S. gold barely changed at $1,663.60.

The dollar index traded near a two-week low hit on Friday. A lower greenback helps underpin sentiment in dollar-priced commodities by attracting buyers holding other currencies.

A recent string of upbeat U.S. economic data, a strong rally on Wall Street and a surge in U.S. Treasury yields have cooled investor interest in gold, but some analysts believe gold's rally has not yet run its course.

"There's a good chance we'll see a relapse in U.S. data since the economy is in a fragile recovery, which will lead to the speculation on more quantitative easing, and that is positive for gold," said Hou Xinqiang, an analyst at Jinrui Futures in the southern Chinese city of Shenzhen.

Hou said oil prices are unlikely to slide easily from current high levels given the sticky situation in Iran - another supportive factor for gold.

Investors will closely watch changes in holdings of various physically backed exchange-traded gold funds in the last week of the quarter.

The SPDR Gold Trust, the world's biggest gold ETF, said its holdings fell 0.8 per cent last week, the biggest weekly decline since late December.

This week, investors will also monitor key economic data from Germany, bond auctions in Italy and a meeting of euro zone finance ministers, during which the size of a bailout firewall is to be discussed.