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Gold rose one per cent on Monday, recovering last week's losses, on increased risk appetite as the dollar softened, while violence in the Middle East and talks to resolve an imminent fiscal crunch in the United States lent support.
Spot gold rose 1.02 per cent to $1,731.00 an ounce by 1430 GMT, having earlier jumped to $1,732.10. US gold gained 0.97 per cent to $1,731.40.
Spot silver rose 2.42 per cent to $32.99 an ounce.
"We've seen oil prices head higher on the unrest in the Middle East and I think that is leading to some worries, even though there is a general day of 'risk on' with equities being up," said Christin Tuxen, analyst at Danske Bank.
The dollar index fell from a two-month high hit on Friday, making commodities priced in the greenback more affordable for buyers holding other currencies.
World stock markets and commodities rose on Monday, recovering some of their sharp losses last week, on signs of progress in talks to resolve the fiscal crunch in the United States.
Eugen Weinberg, global head of commodities research at Germany's Commerzbank, said gold's one per cent rise as the dollar softened was linked to increased risk appetite for the precious metal rather than its appeal as a safe haven.
However, some analysts saw the increasing conflict in the Gaza Strip triggering buying in precious metals.
"We still have some fairly important tensions in that part of the world, hence there is a demand for safe havens, such as gold," Tuxen said.
Worries over the unresolved euro zone debt crisis, and the continuing talks to resolve the "fiscal cliff", supported gold. The gold market's attention is largely focused on the budget talks between US President Barack Obama and Congressional leaders.
Gold's safe haven status would shine in the case of failed talks and political paralysis, while success in avoiding the fiscal disaster may dampen sentiment in gold, analysts said.
US lawmakers expressed confidence on Sunday that they could reach a deal to avert the $600 billion "fiscal cliff", which threatened to send the giant economy back into recession.
The discussions between the two parties are unlikely to go smoothly, which would potentially benefit gold.
Ole Hansen, vice president of Saxo Bank, said that once the fiscal crunch is resolved, the underlying interest rate environment was likely to remain low for some time, potentially supporting gold prices.
"If the parties in the US reach agreement, that would remove uncertainty and gold's safe haven status. But the low interest rate environment is not going to go away," he said.
Low interest rates increase inflationary fears, and can support gold which is often seen as a hedge against inflation.
Traders will be looking for any clues of the Federal Reserve's future intentions when chairman Ben Bernanke speaks at the Economic Club of New York on Tuesday.
Referring to the violence in the Middle East, Peter Fertig, a consultant at Quantitative Commodity Research, said: "The situation in the Middle East could be supportive for precious metals. The situation is supportive for the price of crude and precious metals often rise with higher crude prices."
Israel bombed dozens of suspected militant sites in the Hamas-ruled Gaza Strip on Monday and Palestinians kept up their cross-border rocket fire as international pressure for a truce intensified. Reuters market analyst Wang Tao expected spot gold to rise to a resistance zone of $1,734 to $1,738 an ounce during the day, driven by an upward wave c.