Gold rallied more than 1 per cent on Monday, buoyed by rising tensions in the Middle East and a sharp drop in stocks and the dollar following weak Chinese data that fuelled concerns over global growth.

Platinum group metals, which as largely industrial commodities are more exposed than gold to economic weakness, dropped sharply after Chinese manufacturing surveys undermined any hopes for a recovery in the sector.

Spot gold was up 1.2 per cent at $1,073.20 an ounce at 1025 GMT, while U.S. gold futures for February delivery were up $12.30 an ounce at $1,072.50.

Gold rose after Saudi Arabia cut diplomatic ties with Iran after Iranian protesters stormed its embassy in Tehran, following Riyadh's execution of a prominent Shi'ite cleric on Saturday. That lifted oil prices as much as 3 per cent.

Though oil retraced those gains after the Chinese data prompted growth concerns, gold benefited further from weakness in stocks and the dollar.

"The whole Saudi-Iran situation is obviously a worry, in the sense of two big regional powers seemingly at loggerheads, so there could be a bit of a safe haven bid," Mitsubishi analyst Jonathan Butler said.

"Gold was pretty hard hit over the course of last year. With index rebalancing probably taking place over the next couple of weeks, we may see some shifting of investment flows back into gold as an underperforming asset," he said. "You've got the euro catching a bid against the dollar, which is also helping gold."

Gold ended 2014 down 10.4 per cent, a third straight annual loss, having touched a near six-year low in December at $1,045.85 an ounce.

The metal faces another tough year in 2016 as U.S. interest rates are expected to rise and the dollar strengthen, with analysts predicting further price drops.

The Federal Reserve raised U.S. rates for the first time in December, and is expected to increase them further this year. Higher rates dent demand for non-interest-paying gold, while supporting the dollar.

In a reflection of bearish investor sentiment, assets of the top gold-backed exchange-traded fund, SPDR Gold Shares, fell 0.18 per cent to 642.37 tonnes on Thursday, close to a seven-year low.

"Over the course of (last) year, holdings in the SPDR Gold ETF fell 66.65 tonnes, from 709.02 tonnes to 642.37, which sums up the fading sentiment towards gold throughout the year," MKS said in a note.

Silver was up 1.4 per cent at $13.98 an ounce, while platinum was down 1.7 per cent at $874.75 an ounce and palladium was down 2.1 per cent at $550 an ounce. – Reuters