Analysts expect the buying activity to spur more upside for now. Gold had been crushed as the dollar gained on expectations that the Fed tapering its USD 85 billion a month in bond purchases would drive interest rates up.

Gold prices jumped as the dollar slipped, giving the precious metal its best day of the year Monday and setting up for further gains.

U.S. gold futures for August delivery rose 3.3 percent, to a four-week high USD 1,336 a troy ounce, its best one-day gain since June 2012. The dollar index was down about 0.5 percent in afternoon trading, at 82.19.

"You've got technical momentum," said RBC commodities analyst George Gero. "You have fund buying. You have physical need for gold in the forwards in Europe, and you have no willing sellers left because we had that selloff to below USD 1,200. Almost anyone who was a weak holder got out. On Thursday, there's expirations, and that encourages short covering."

Analysts expect the buying activity to spur more upside for now. Gold had been crushed as the dollar gained on expectations that the Fed tapering its USD 85 billion a month in bond purchases would drive interest rates up. The 10-year Treasury note, which had reached a recent high of 2.75 percent, was at 2.48 percent Monday.

But as the Fed has tempered expectations for tapering to a gradual withdrawal with no hike in short-term rates, the dollar has pulled back and gold has found support. Gold, which entered a bear market in April, struck a low of USD 1,179 on June 28.

"What [Fed Chairman Ben] Bernanke's been trying to do for the past few weeks is push the marketplace into the notion that tapering and the end of quantitative easing is going to be later rather than sooner," said Jim Wyckoff, senior analyst at Kitco. "And I think he's done a good job of convincing the marketplace of that. That's what pressured the dollar, and it's been a bit bullish for raw commodities."

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