Gold prices rebounded on Friday, as the US dollar eased after Italian political tension sparked a sell-off in the country’s bond markets and investors sought a safe haven in bullion.

Spot gold gained 0.2 per cent at $US1,292.12 per ounce, after hitting its lowest since December 27 in the previous session at $US1,285.41.

US gold futures for June delivery settled up $US1.90, or 0.2 per cent, at $US1,291.30 per ounce.

‘Gold got stronger off Italian geopolitics and the sell-off in Italian bond markets,’ said Josh Graves, senior commodities strategist at RJO Futures.

The demands of populist parties likely to form Italy’s next government, which promised to ramp up spending, caused Italian investors to flee bond markets and purchase gold.

‘A debt crisis in Italy would have a far bigger impact than one in Greece. Gold would profit as a result,’ Commerzbank analysts said in a note.

This caused more volatility in global equities, which also provided gold support, Graves added.

Earlier, the sentiment index in gold was indicating it was strongly oversold while the dollar was heavily overbought as US inflation measures were rising, said Gianclaudio Torlizzi, partner at consultancy T-Commodity in Milan.

Thursday data showed a tightening US labour market and mid-Atlantic factory activity picking up, bolstering expectations the Federal Reserve will raise interest rates next month.

‘We think there is room for a strong rally into the summer and we have a gold target of $1,430 by August,’ Torlizzi said.

The US dollar index earlier rose to a fresh five-month peak as the benchmark US Treasury yield hit the highest in nearly seven years.

A stronger greenback makes dollar-denominated gold more expensive for users of other currencies, while higher US yields dampen the appeal of non-yielding bullion.

Spot gold is still expected to hit $US1,302 per ounce as it has stabilised around a support at $US1,287, Reuters technical analyst Wang Tao said.

Spot silver fell 0.4 per cent to $US885.40 an ounce, on track to shed slightly more than one per cent for the week.