Gold regains some luster, has best day of the year

Junko Kimura | Bloomberg | Getty Images

Gold prices jumped as the dollar slipped, giving the precious metal its best day of the year Monday and setting up for further gains.

U.S. gold futures for August delivery rose 3.3 percent, to a four-week high $1,336 a troy ounce, its best one-day gain since June 2012. The dollar index was down about 0.5 percent in afternoon trading, at 82.19.

"You've got technical momentum," said RBC commodities analyst George Gero. "You have fund buying. You have physical need for gold in the forwards in Europe, and you have no willing sellers left because we had that selloff to below $1,200. Almost anyone who was a weak holder got out. On Thursday, there's expirations, and that encourages short covering."

Analysts expect the buying activity to spur more upside for now. Gold had been crushed as the dollar gained on expectations that the Fed tapering its $85 billion a month in bond purchases would drive interest rates up. The 10-year Treasury note, which had reached a recent high of 2.75 percent, was at 2.48 percent Monday.

But as the Fed has tempered expectations for tapering to a gradual withdrawal with no hike in short-term rates, the dollar has pulled back and gold has found support. Gold, which entered a bear market in April, struck a low of $1,179 on June 28.

(Watch now: Gartman: Long stocks, long gold)

"What [Fed Chairman Ben] Bernanke's been trying to do for the past few weeks is push the marketplace into the notion that tapering and the end of quantitative easing is going to be later rather than sooner," said Jim Wyckoff, senior analyst at Kitco. "And I think he's done a good job of convincing the marketplace of that. That's what pressured the dollar, and it's been a bit bullish for raw commodities."

Fed officials have assured markets that though they could start winding down the bond purchases by year-end, they will rely on economic data to determine their asset purchases and they have no intention of raising the Federal funds target rate anytime soon.

Traders said gold gained momentum after piercing $1,300, a level it had failed to break above over the last several weeks. Large speculative short positions also have been built up in gold as it declined. The Commodity Futures Trading Commission's latest weekly data show that funds' gold net-long positions rose 48 percent, increasing for the first time since the start of June as traders covered short positions.

Net longs also rose for silver, which gained 5.4 percent Monday.

(Read more: Why silver may not outshine gold after all)

Gero at RBC said there has been strong buying interest in gold from China and Japan but that India, the biggest market, is still sidelined because of new taxes on gold and a weak currency.

On Monday, the Reserve Bank of India moved to tighten gold imports again by restricting bank holdings of the metal. It asked all nominated banks and agencies to export at least a fifth of every lot of imported gold in all forms and to make it available only to local jewelers. India has been struggling to contain its record current account deficit.

"The fact that we settled above the April 15 low of $1,321 is bullish," said Kevin Grady, president of Phoenix Futures and Options. "It should attract some more buying. The $1,335 we're sitting on is a very key area."

Wyckoff said the next upside target is $1,350.

(Read more: How to trade the gold bounce: Pro)

"I think the gold market today gained some good upside technical momentum," he said. "The price action negated a 9.5-month-old down trend on the daily chart. Also, we have a fledgling 3-week-old uptrend," he added. "It's a near-term bottom. We'll have to wait and see if it's any kind of a longer-term bottom. Certainly the bulls have gained important near-term technical momentum."