NEW YORK/LONDON: Gold started the third quarter on a strong footing to jump over 2 percent on Monday as technical buying and speculative short covering offset concerns that the US Federal Reserve will rein in its stimulus program.
Prices surged 2.2 percent 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 percent, at $1,253.0 an ounce by 3:59 p.m. EDT (1959 GMT).
Comex gold futures for August delivery settled at $1,255.7 per ounce, up $32 or 2.6 percent.
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 euro zone, Japan and United States signaled a continued tentative global recovery, boosting equities, copper and oil prices.
US manufacturing expanded in June, while Japanese and European data pointed to stabilizing 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 percent 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 percent in June, bringing year-to-date losses to 20 percent.
Investor confidence in gold - which fell a record 23 percent 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 emphasize that the euro zone economy is in a different stage of recovery than the United States.
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