Gold prices gained on Monday following a steep fall in the previous session as tensions in West Asia and weaker financial markets supported the metal, while a stronger dollar kept a lid on gains.

Spot gold was up 0.2 per cent at $1,427.31 per ounce, as of 0735 GMT. The metal hit $1,452.60 in the previous session, its highest since May 2013, before closing 1.5 per cent lower. US gold futures were up 0.1 per cent at $1,427.80 an ounce.

“Over the weekend, what happened between Iran and the UK is supporting gold prices today,” said Brian Lan, managing director at dealer GoldSilver Central in Singapore.

“Also, equities are lower and at this point of time with geo-political tensions and the Fed looking to cut rates, gold looks attractive, but people are worried about the stronger dollar.”

Iran's Revolutionary Guards said they had captured a British-flagged oil tanker in the Gulf after Britain seized an Iranian vessel earlier this month, ratcheting up tensions along a vital international oil shipping route.

Britain was weighing its next moves on Sunday, with few good options apparent as a recording emerged showing that the Iranian military defied a British warship when it boarded and seized the ship three days ago.

Meanwhile, Asia stocks eased on Monday as investors reduced expectations of an aggressive interest rate cut by the Federal Reserve.

Likelihood of a smaller rate cut from the US central bank lifted the dollar, making gold expensive for investors holding other currencies.

The Wall Street Journal reported the Fed was likely to cut rates by 25 basis points when it meets later this month, and may make further cuts in the future given global growth and trade uncertainties.

Expectations for a rate cut of half a percentage point at the Fed's July 30-31 meeting edged out further on Monday to hit 14.5 per cent, according to CME's FedWatch tool, down from as high as 71 per cent last week.

“Geopolitical risks from the Persian Gulf could provide some support for the yellow metal, but the next major move will likely be if the Fed is dovish enough for markets,” Edward Moya, a senior market analyst at OANDA, said in a note.

Holdings of SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, rose 0.72 per cent to 820.49 tonnes on Friday from Thursday.

Hedge funds and money managers raised their bullish stance in COMEX gold in the week to July 16, the US Commodity Futures Trading Commission (CFTC) said in a report on Friday.

Among other precious metals, silver rose 0.9 per cent to $16.35 per ounce. Platinum gained 0.9 per cent to $850.73 an ounce and palladium climbed 0.3 per cent to $1,509.24.

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