Gold was trading near its highest in nearly a week on Monday, retaining sharp short-covering gains from the previous session, but the metal could be susceptible to losses given weak investor sentiment and a strong dollar.

Spot gold had eased 0.2 percent to $1,192.25 an ounce as of 0046 GMT, largely retaining Friday’s 1.8 per cent gain. The metal rose to a peak of $1,199 on Friday, its highest since December 22 and its biggest one day jump in 2-1/2 weeks.

Short-covering, liquidity conditions

Bullion jumped on short-covering amid thin market conditions, raising questions about whether the gains can hold. Liquidity has been thin due to the Christmas and year-end holidays.

Gold prices were also buoyed on Friday by news reports that China, the world’s top consumer of gold, was considering a policy change to reinvigorate the economy by allowing banks to have more money available for lending and investment.

Bearish sentiment

Bearish sentiment in the bullion market was evident in the SPDR Gold Trust, the world’s largest gold-backed exchange-traded fund.

The fund’s holdings fell 0.08 per cent to 712.30 tonnes on Friday, a six-year low.

Flows in and out of the fund tend to influence gold prices due to the size of its holdings.

Also hurting gold is the strong outlook for the US dollar, reflecting a robust economy and the possibility of higher interest rates.

Dollar index

The dollar index, which tracks the greenback’s value against a basket of currencies, was trading close to a nine-year peak hit last week.

A strong dollar makes gold more expensive for the holders of other currencies and reduces its appeal as a hedge. Oil prices remain soft, hurting gold’s appeal as a hedge against dollar-led inflation.

Traders will be looking at buying in top consumer China and US economic data for cues.

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