Gold gains as dollar rally comes off the boil

Gold edged up on Tuesday from a 2018 low as the dollar fell from its five-month high, although risk appetite in the broader financial markets kept the metal`s gains in check. The dollar lost momentum following a rally prompted by rising U.S. bond yields and the prospect of a resolution to U.S.-China trade tensions. A weaker dollar makes dollar-priced gold cheaper for non-U.S. investors.

Washington and Beijing both claimed victory on Monday as the world`s two largest economies stepped back from the brink of a trade war and agreed to hold further talks to boost U.S. exports to China.

"This quarter and maybe going into next, gold will continue to struggle but the (positive) views on the U.S. economy are overdone," said Philip Newman, director at Metals Focus. 

"There are concerns over sizeable U.S. debt, there`s the (U.S.) mid-term elections in November, there`s enough out there that could see the dollar eventually weaken and gold prices start to improve through the back end of this year."

Spot gold edged up 0.2 percent to $1,294.91 per ounce by 1158 GMT. In the previous session, it slid to $1,281.76, its lowest since Dec. 27.

U.S. gold futures for June delivery rose 0.3 percent to $1,294.60 per ounce.

Capping gains in gold, European shares inched to a near four-month high as an easing of pressure on Italian markets coincided with China`s latest move to open its economy to the rest of the world.

Gold, regarded as a safe haven, tends to weaken when there is strong investor appetite for equities, seen as riskier assets. 

"The overriding narrative here is where the dollar is going," said Stephen Innes, APAC trading head at OANDA. Abating geopolitical risk was also weighing on sentiment for gold, he added. 

Meanwhile, expectations that the Federal Reserve will raise U.S. interest rates again next month added to downward pressure on gold. Higher U.S. rates tend to boost the dollar and push bond yields up, making non-yielding assets such as bullion less attractive.

Innes said any drop to somewhere around the $1,275 level would start to attract more bullish sentiment. "But in the meantime the driver is going to remain the U.S. dollar," he added.

Holdings in SPDR Gold Trust, the world`s largest gold-backed exchange-traded fund, fell 0.38 percent to 852.04 tonnes on Monday. 

Silver rose 0.8 percent to $16.60 an ounce, while palladium fell 1.4 percent to $975.72 an ounce.

Platinum climbed 1.4 percent to $908.50 an ounce, after marking a low for the year in the previous session at $873.50.