Gold rose back toward $1,350 an ounce in Europe on Monday as the dollar languished, with confidence in the U.S. currency undermined by expectations the Federal Reserve will persist with a loose monetary policy.
The dollar has lost significant ground in recent weeks due to speculation that the Fed will introduce further monetary easing after a spate of soft economic data. This helped push gold prices to a record $1,364.60 an ounce last week.
Spot gold was bid at $1,348.95 an ounce at 1438 GMT, against $1,343.25 late in New York on Friday. U.S. gold futures for December delivery rose $4.40 an ounce to $1,349.70.
Afshin Nabavi, head of trading at MKS Finance in Geneva, said he remains broadly positive on gold, with the dollar the main driver of the market.
"$1,339-$1,340 ought to remain a good support," he said. "A breach of that could send us to $1,335, but I still think $1,400 a good possibility for the year-end."
"This move is probably a correction in a thin market with some of the New York guys absent," he said, referring to Monday's holiday in the United States.
The dollar stayed under pressure on Monday, with the IMF's failure to reach an accord on how to tackle currency tensions at meetings over the weekend seeming to ensure such concerns would only mount up.
Sources told Reuters on Monday that China has raised reserve requirements by 50 basis points for six large commercial banks in a move to drain cash from the economy, the latest in a succession of moves to tighten credit conditions in some global markets.
Expectations for further quantitative easing are likely to continue boosting precious metals, analysts said.
"We view quantitative easing and its monetary consequences as an unequivocal benefit for gold and silver in particular, as investors seek out their role as stores of value in times of fiat currency risk," said Morgan Stanley in a note.
As well as currency effects, gold is being supported by expectations investors will add to their bullion holdings as a portfolio diversifier, both in the private and official sectors.
Russia's central bank has bought over 100 tons of gold on the domestic market this year, board member Sergei Shvetsov said on Monday, and speculation is rife that other central banks, mainly in Asia, will also lift their holdings.
Gold supply is struggling to meet rising demand. Output in number one producer China was 27.655 tons in August, the Ministry of Industry and Information Technology said on Monday, down 11 percent from 31.059 tons in July.
Silver hit its highest level since 1980 at $23.65 an ounce and was later bid at $23.21 an ounce against $23.20.
Holdings in the iShares Silver Trust, the world's largest silver-backed exchange-traded fund, rose to a new all-time high at 10,085.62 tons on Friday.
The gold-silver ratio - the number of ounces of silver needed to buy an ounce of gold - fell to its lowest in more than two years on Monday near 57, down from above 68 in late August, as silver became increasingly expensive compared with gold.
"We continue to favor silver as industrial demand and imports into China are expected to push the gold/silver ratio lower," said Deutsche Bank in a weekly note.
Platinum was at $1,688.50 an ounce against $1,699.35, and palladium at $585.50 against $583.53.
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