Gold rose more than 2 percent on Monday to its strongest since early October after violence between Israel and Hamas pushed up oil prices on fears of supply disruptions, and spurred safe-haven buying in bullion.
Demand from Japanese investors, who fretted over the deepening global economic downturn, also drove gold prices higher but thin trading ahead of the year-end exaggerated movements. Gold has rallied more than 30 percent since hitting a 13-month low two months ago.
Gold hit an intraday high of $889.55 an ounce before easing to $881.85 an ounce by 0454 GMT, still $15.05 higher than New York's notional close on Friday. Gold has gained more than 6 percent in the past week.
"From a gold perspective, prices are certainly likely to move higher on any tensions, wars and uncertainty. But what was more surprising was the timing of the violence between Israel and Hamas," said Adrian Koh, analyst at Phillip Futures in Singapore.
"That's the thing that caught everyone by surprise. The markets are still very much in thinned-holiday trade and the news of the violence basically spurred buying and pushed prices past key resistance levels."
U.N. Secretary-General Ban Ki-moon called for an immediate end to all violence in Gaza, where at least 300 Palestinians were killed in two days of attacks as Israel stepped up air strikes and prepared for a possible invasion
Oil rose more than $2 to above $39 a barrel in reaction to the violence, lifting gold's safe-haven appeal in times of turmoil.
The physical market saw buying from Japanese investors but high prices also encouraged some holders to cash in, putting pressure on premiums for gold bars in Hong Kong and Singapore.
"The Japanese have been on the buying side since last week and that helps push up spot prices. Jewellers are basically out of the market because of the year-end, and we see light selling from Vietnam, Thailand and Indonesia," said a physical dealer.
Premiums for gold bars slipped to 30 U.S. cents to the spot London prices from 50 cents last week in Singapore. Gold bars were on par with London prices in Hong Kong.
"Whether or not we'll see a reversal, given that there is not a great deal of activity out there, is debatable. I suspect we may remain elevated for the rest of the day," said Darren Heathcote of Investec Australia in Sydney, referring to gold prices.
"The fact that it's sort of stalled where it is might well prevent it from breaking through $900 but I guess there's still a chance when London opens and they really soak up the news about the troubles in the Middle East. Maybe, there will be some more buying as a result," he said.
Gold last traded above $900 in early October and hit a lifetime high of $1,030.80 in March, partly driven by fears of rising energy costs as oil struck a record.
Other precious metals tracked gold higher, with platinum trading at $921.50 an ounce, up $33.00 from New York's notional close.
New York gold futures added $13.80 an ounce to $885.0 in electronic trade.
