LONDON: Gold hit a three-week high, with buyers emboldened in thin trade by dollar weakness and a growing view that US monetary stimulus reduction would probably require additional positive economic data.

Spot gold surged 2 percent to $1,267.26 an ounce, its highest since Nov. 20. It was last up 1.8 percent at $1,263.39 an ounce by 1541 GMT, while US gold futures for February delivery were $29.80 higher at $1,263.10.

Bullion gained respite from five-month lows hit last week as investors who had placed heavy bets on sharp losses, or short positions, found themselves over-extended.

That was borne out as CFTC data showed hedge funds and money managers raised their bearish bets in US gold futures and options.

“On Friday (investors) tried to push gold lower on the better employment report but they were not successful...so investors are closing positions and liquidity is drying up so the move is getting larger,” said Georgette Boele, FX and commodity strategist at ABN Amro.

Boele played down sustained upside for gold, adding that it would probably not go too far above $1,300.

“The overall view in the market is that it will go lower...so the people who are a bit nervous and recently put in place the (short) positions will be out.”

“A lot depends of course on what the dollar is going to do.”

On currency markets, the euro hit a six-week high against the dollar, while the dollar fell against major currency rivals making gold and other commodities priced in the US unit more attractive for overseas investors.

Signs of improvement in the global economy have undermined the case for non-yield bearing gold, as markets focus increasingly on the Fed’s tapering timeline.

But a Reuters poll on Monday showed the Fed was still expected to start the process in March, even though some economists say that it might do so as early as this month.

“The case for a looming reduction in the Fed’s accommodative stance is strengthening, while the QE3 guessing game is set to continue for a while longer, also fueling some choppy bullion trading ahead,” VTB said in a note to clients.

Several Fed officials have lent credence to the idea that a tentative reduction was on the near-term horizon.

St. Louis Fed President James Bullard said the bank could slightly reduce its monthly bond purchases this month, while Dallas Federal Reserve Bank President Richard Fisher also said tapering should start next week.

Gold has lost about a quarter of its value this year largely on fears the bond purchases would be scaled back.

In other metals, silver continued to take influence from gold and even outperformed the metal to rise 2.5 percent on the day to $20.30 per ounce. Platinum rose 1 percent to $1,385.25, while palladium shed 0.1 percent to $732.25.