Gold on Monday saw its biggest one-day rise since January as some dealers scrambled to cover short positions and the May options expiry triggered more buying.
U.S. gold futures for June delivery settled up 2.4 percent, its best percentage jump since January 15, at $1,203.20 an ounce. Meanwhile, rose 2.1 percent to $1,204 an ounce. On Friday spot prices slipped as low as $1,174.73 an ounce.
"It's quite undervalued and we've had a long period of consolidation around the $1,200 mark," said Mark O'Byrne, research director of bullion dealer GoldCore, noting that the breach of the $1,200 level spurred additional technical buying.
O'Byrne said that while there were several factors spurring the session's rally, short-covering could be the primary driver
Options-related buying also buoyed prices with U.S. May options set to expire at the end of the day with relatively heavy open interest at the $1,200 strike price, traders said.
The spot market jumped around $8 within a five-minute span shortly after 10 a.m. EDT, when technical buyers lifted prices above the 50-day moving average.
Investors awaited the Federal Reserve's policy meeting statement on Wednesday, hoping for clues on the timing of a U.S. rate increase.
Some investors are betting the Fed will wait until later this year, instead of June as previously expected, before raising rates from record lows. However, signs that policy will be tightened sooner rather than later could still pressure gold.
"Market consensus does not expect the first rate hike to be announced at this week's meeting, but (Fed) comments are likely going to be closely watched especially in light of Q1 GDP, which is also due to be released this Wednesday," UBS said in a note.
The dollar fell to a three-week low against a basket of currencies.
Physical gold demand in the major Asian markets was positive after last week's price fall, dealers said, with Shanghai premiums moving up toward $4 an ounce.