LONDON (Reuters) - Gold hit a six-week high on Monday as the euro recovered against the dollar and other commodities climbed, with confidence in the precious metal rising after it recorded three straight weeks of gains for the first time since November.
Gold prices were up 7.1 percent since the end of December, but analysts warned the metal could lose traction if more bad news on the euro zone knocks the euro lower versus the dollar.
Spot gold was up 1.0 percent at $1,674.30 an ounce at 1255 GMT, having earlier hit a high of $1,677.10. U.S. gold futures for February delivery were up $11.3 an ounce at $1,675.40.
"(Gold) is going up as a commodity at the moment," said Simon Weeks, head of precious metals at the Bank of Nova Scotia. "Commodities have had a good start to the year, full stop."
Its move may prove unsustainable in the longer run, he added however.
"If you believe things are improving, you wouldn't want gold anyway, so there is a limit to how long it can go up wearing a commodity hat," he said.
The euro swung higher versus the dollar on Monday after recording losses in Asian trade, though the single currency is vulnerable to uncertainty over crucial talks on a Greek debt swap deal to avert a messy default, dealers said.
Private creditors said they had come to the limits of what losses they could concede in a Greek debt swap, putting the ball in the court of the EU and the IMF in a tense race against the clock to avoid a messy default.
Despite this, prices of raw materials like crude oil and key industrial metals firmed on Monday, with Brent crude rising nearly 90 cents a barrel in early trade. EU envoys agreed to embargo Iranian oil from the start of July.
European shares also firmed on Monday, led by banking and cyclical stocks, ahead of a meeting that will ascertain whether Greece will be able to reach an agreement with its private creditors on a debt swap deal vital to avoid a default.
The STOXX Europe 600 Banks index was the best performing sector.
Safe-haven German Bund futures reversed gains on Monday, meanwhile.
Money managers, including hedge funds and other large speculators, raised bullish bets on gold to a one-month high at 116,978 lots, while they boosted their exposure in silver to the highest level since late November 2011, data from the U.S. Commodity Futures Trading Commission showed.
"The slow grind higher in gold speculative positioning on Comex reflects the cautious optimism that appears to dominate market sentiment at the moment," said UBS in a note.
"That investors have become friendlier to gold is clear, but as gold's correlation with risk and the euro remains strongly positive - although easing somewhat - longs are likely to remain more tentative than aggressive given the still-uncertain macroeconomic environment."
On the physical side of the market, Indian gold demand firmed as the stronger rupee increased local buyers' purchasing power for the dollar-priced metal.
Volumes were light elsewhere as markets closed in China - the world's number two gold consumer - Singapore, Malaysia and Indonesia for the Lunar New Year break.
Silver was up 1.3 percent at $32.58 an ounce, tracking gains in gold. Spot platinum was up 1.1 percent at $1,547.49 an ounce, while spot palladium was up 0.9 percent at $679.47 an ounce.
The platinum/palladium ratio - the number of palladium ounces needed to buy an ounce of platinum - held near its lowest since early January on Monday at 2.26, having fallen from the one-year high it hit in late November at 2.71.
"Palladium outperformed platinum, partly owing to comments from Norilsk Nickel's CEO that the company will reduce production this year due to a slight fall in global metal demand," said Morgan Stanley in a note.
Reporting by Jan Harvey; Editing by William Hardy