LONDON Gold fell as much as 2 percent on Monday as the dollar strengthened and investor appetite for risk increased, but the metal remained above $1,200 an ounce after a rally that pushed prices to one-year highs this month.
Concern over financial instability and the repricing of expectations for U.S. interest rate rises, has helped the metal outperform most assets so far this year with a 15 percent gain.
Spot gold, which posted small losses last week on profit-taking after rallying to $1,260.60 on Feb. 11, was down 1.3 percent at $1,211.91 by 1341 GMT. It had earlier fallen 2.2 percent to a session low of $1,201.63.
"Despite the move lower, the contagion of negative interest rates elsewhere signal that gold is not suddenly going to retrace its way back to its lows," Citi strategist David Wilson said.
The dollar rose 0.9 percent against a basket of leading currencies, supported by strong U.S. data on Friday, and European shares jumped to multi-month highs.
"The dollar weakness seems to have run its course and is not providing the support that we saw earlier this month ... in the short term I would favour a move towards $1,168," Saxo Bank senior manager Ole Hansen said.
"Gold has had such a strong build in a relatively short period of time that if there is a bit of a change in the surrounding markets, gold will be exposed," Hansen said.
But investor sentiment remained largely bullish and was evident in fund flows. SPDR Gold Trust, the world's top gold exchange-traded fund, on Friday recorded the biggest single-day inflow since August 2011.
The fund's inflows since the beginning of the year have already surpassed the outflows for the whole of 2015.
Other data showed that speculators increased their bullish bet in COMEX gold futures and options to their highest in nearly four months in the week to February 16.
Bank of America Merrill Lynch said on Friday investors shovelled $3.2 billion into gold, the biggest two-week gold inflow since May 2010.
"Increases in ETF (exchange-traded fund) holdings continue to support gold higher, while we have seen some of this buying momentum offset by reductions in TOCOM positioning and recent selling in China," said MKS Group trader Sam Laughlin, referring to the Tokyo Commodity Exchange.
Top consumer China has been selling gold since its return from a week-long holiday last Monday, a sign Chinese investors do not expect prices to go much higher and cannot be counted on to support the market.
Silver fell 1.4 percent to $15.11 an ounce, while spot platinum fell 1.4 percent to $925.80 and palladium slipped by 0.4 percent to $497.22.
(Additional reporting by A.Ananthalakshmi in Singapore; Editing by David Goodman and David Evans)