LONDON: Gold rose on Monday, as rallying stock markets and a broadly lower dollar helped the metal recoup some of last week's losses, but investors were cautious ahead of Fed Chairman Ben Bernanke's testimony to Congress later this week.
Analysts said the market was also finding background support from a downgrade of Britain's credit rating by Moody's and signs that Japan would continue with ultra easy monetary policy.
Spot gold rose 0.7 percent to $1,592 by 1121 GMT. It hit a seven-month low of $1,554.49 on Thursday after minutes from the US Federal Reserve's last meeting triggered worries the central bank might wind down its bond buying programme.
US gold futures for April delivery rose 1.2 percent to a session high of $1,592 an ounce. It was last seen at $1,591.50, still up 1.1 percent.
"With supportive news over the weekend, we can argue that we have removed quite a lot of overhangs seen in gold recently but we need to see a move above $1,600 and even $1,625 before we start talking about a recovery," Saxo Bank head of commodity strategy Ole Hansen said.
Moody's slashed the UK's AAA rating by one notch, raising prospects of continued loose monetary and fiscal policy, while Japan is likely to nominate a proponent of aggressive monetary easing as its next central bank governor.
Accomodative monetary policies are seen as positive for the metal, as rampant cash printing would undermine currencies.
The focus remains on the United States this week, where more clues are sought about the country's monetary policy stance. Bernanke will deliver his semi-annual monetary policy report on Feb 27.
"Ben Bernanke may quell speculation about a halt to quantitative easing, supporting gold," Hansen said.
Added to that, analysts said that about $85 billion in across-the-board government spending cuts could kick in on March 1, in a process called sequestration.
"Later this week, a failure to the US sequestration talks may also imply lower economic growth, which plays in the hands of gold, as it could also indicate that stimulus could stay with us longer."
In other markets, shares firmed, while the euro bounced from a six-week low against the dollar, but further upside may be limited as investors eye Italian elections, where an unstable government could cause another crisis of confidence in the European Union's single currency.
Overall confidence in gold was still fragile, with holdings of the SPDR Gold Trust falling 42.3 tonnes to 1,280.67 tonnes last week, its largest weekly outflow since August 2011.
Gold net long positions fell by 3.5 million ounces to 12.8 million ounces in the week to Feb 21, the lowest level since May, according to the latest Commitment of Traders data.
"The bulk of the decline in net long positions can be attributed to a large increase in short positions," HSBC said in a note.
"With near-record short positions on gold, a potential shortcovering on bullion may lead to higher prices."
Gold speculative short positions stood a multi-year high of 12.5 million ounces.
Buying at lower levels by investors of physical gold in Asia helped lift prices, while a slower growth in China's manufacturing sector in February also raised concerns about the recovery of the global economy, analysts said.
The wedding and festival season are underway in India, the world's top gold consumer, with jewellery a key part of celebrations.
Russia and Turkey both raised gold holdings for a second consecutive month in January, data from the International Monetary Fund showed, highlighting central banks' interest in diversifying part of their reserves into bullion.
Spot platinum rose 0.9 percent to $1,619.49 an ounce, after prices fell 3 percent to a five-week low of $1,593.45 on Thursday. Palladium was up 1.5 percent at $747 an ounce, having fallen to a one-month trough of $707.22 last week.
Spot silver edged higher 1.6 percent to $29.14 an ounce.
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