LONDON - Gold edged higher on Monday, taking support from a retreat in the dollar as Italian political risk receded, but the prospect of a further U.S. interest rate rise by the Federal Reserve this month kept a lid on gains.
The metal fell on Friday after stronger than expected U.S. payrolls data shored up expectations that the Fed would press ahead with another rate hike at its June meeting.
Gold is highly sensitive to rising 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 0.1 percent at $1,293.89 an ounce at 0952 GMT, while U.S. gold futures for August delivery were 0.1 percent lower at $1,297.90 an ounce.
The strength of the interest rate hiking cycle in the United States is outweighing other factors for the moment, Julius Baer analyst Norbert Rucker said.
"Investment demand for gold is just not strong enough to lift the price sustainably," he said. "Near term the U.S. 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 climb 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 U.S. jobs data.
Finance leaders of the closest U.S. allies vented anger over the Trump administration's metal import tariffs on Saturday. Gold has struggled to capitalise on the trade stand-off however as attention shifted to the outlook for U.S. rates.
Speculators raised their net long position in COMEX gold contracts to the strongest since late April in the week to May 29, at 61,235, U.S. Commodity Futures Trading Commission (CFTC) data showed on Friday.
However, gold-backed exchange-traded funds saw outflows later in the week, suggesting investment appetite was softening. Holdings of the largest gold ETF, U.S.-listed SPDR Gold Sharees, fell 10.6 tonnes on Friday, its biggest one-day outflow in nearly four months.
Silver was up 0.5 percent at $16.44 an ounce, while platinum was 0.2 percent higher at $900.75 and palladium was up 0.6 percent at $1,005.40 an ounce.
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.