Spot gold was 0.5 per cent higher at $2,063.78 per ounce, after touching a more than two-week high of $2,070.39 in the earlier session and U.S. gold futures increased 0.3 per cent to $2,074.90 per ounce

Gold prices increased in holiday-thinned trade on Tuesday as the U.S. dollar and bond yields weakened on growing prospects for interest rate cuts by the Fed as early as March next year.

Spot gold was 0.5 per cent higher at $2,063.78 per ounce, as of 0401 GMT, after touching a more than two-week high of $2,070.39 in the earlier session. U.S. gold futures increased 0.3 per cent to $2,074.90 per ounce.

Gold prices have resumed their upside into the new week, after receiving the go-ahead from softer-than-expected U.S. PCE data last Friday, which validates the dovish rate expectations priced by markets, IG market strategist Yeap Jun Rong said.

As long as the trend in economic data remains, gold prices may eye another break of the upper consolidation range at the $2,080 level ahead, Yeap said.

Data on Friday showed that U.S. prices dropped in November for the first time in more than 3-1/2 years, lowering the annual increase in inflation further below 3 per cent.

Lower interest rates decrease the opportunity cost of holding non-yielding bullion.

Traders are now pricing-in an 89 per cent chance of a rate cut by the Federal Reserve in March, as per the CME FedWatch tool.

The dollar index fell 0.1 per cent, making gold more attractive for other currency holders, while the benchmark U.S. 10-year bond yield dropped to 3.8838 per cent.

Gold is seen as a safe-haven asset during times of geo-political uncertainty.

Spot silver gained 0.8 per cent to $24.37 per ounce, while platinum added 0.2 per cent to $972.85, and palladium rose 0.6 per cent to $1,209.74.