Spot gold prices firmed on Monday, regaining some lost ground after falling for two consecutive days, while holdings in the SPDR Gold Trust rose for the first time in two weeks, as investors entered the market to bargain-hunt.

The euro rose to its highest in more than two months on Monday, after upbeat data from Germany showed business sentiment rose to its highest in 20 years on the back of a manufacturing sector now fully recovered from the 2008 financial crisis.

The improved economic outlook over the past weeks has dimmed gold's appeal as safe-haven investment, but concerns about inflation may continue to support, analysts said.     

"The market is watching the risk appetite revolving around the euro. With that risk appetite increasing, that takes away some of the safe-haven support in gold," said Mark Pervan, an ANZ analyst.

"But that's passing to some degree, once the support from European data has sort of been processed. The market is now swinging back to looking at the slightly weak US dollar and that might spur some support.”

The dollar index hovered near its two-month low hit on Friday. Spot gold rose by 0.7 per cent to $1,351.04 an ounce by 0306 GMT, after dropping to a two-month low of $1,337.5 on Friday.

US gold futures gained 0.7 per cent to $1,350.7. But a bearish target at $1,322 per ounce is unchanged for spot gold, as a downtrend is steady and expected to continue, said Reuters market analyst Wang Tao.

Holdings in the SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, jumped 1.6 per cent to 1,271.769 tonnes. It was the first rise in about two weeks, and biggest rise in more than seven months.

The holdings increase signals return of interest from some investors, who saw the $1,340 level a solid support and expected gold prices to further rise in an improving economy.

"You've got the old usual factors, such as inflation, which is globally going up. We are at the beginning of a recovery, what will happen if the recovery is in full swing?" said Darren Heathcote, head of trading at Investec Australia.

Fears about inflation spurred a slide in Asian equities since the start of 2011, but the decline is not a rush by investors to exit emerging markets but a paring of exposure to economies seen with most to lose.

Speculative net long positions in US gold futures fell to 164,993 by Jan 18, from 177,372 a week earlier, the US Commodity Futures Trading Commission said.

Holdings in the iShares Silver Trust , the world's largest physically backed exchange-traded fund, fell 1.3 per cent to 10,394.53 tonnes, its lowest since early November.

Spot silver rose by 1.6 per cent to $27.92 an ounce, recovering from a three-day losing streak that took the metal to $27.10 on Friday, its lowest since end of November.

Platinum group metals, used widely in industrial applications, held up better than gold or silver. Spot platinum  edged up 0.3 per cent to $1,828.50 an ounce, up 3.5 per cent so far this year, compared with a five-per cent decline in gold and ten-per cent slide in silver.

Spot palladium rose to an intra-day high of $823.72, less than two dollars off $825.50, its highest since March 2001. – Reuters