Gold gains as political turmoil in Italy rocks financial markets

By Maytaal Angel

LONDON (Reuters) - Gold edged up on Tuesday as a deepening political crisis in Italy provoked a second day of heavy selling on European financial markets, though a buoyant dollar kept the precious metal's gains in check.

Italy's president set the country on a path to early elections on Monday, appointing a former International Monetary Fund official as interim prime minister with the task of planning for snap polls and passing the next budget.

Investors fear repeat elections - which could take place as soon as August - might serve as a quasi-referendum on Italy's role in the European Union and euro zone and strengthen the country's eurosceptic parties even further.

But keeping a lid on gold's gains, the turmoil in Italy pushed the dollar up to a 6-1/2 month high versus the euro, making dollar-priced gold costlier for non-U.S. investors.

Spot gold was 0.4 percent higher at $1,302.96 per ounce at 1152 GMT, while U.S. gold futures for June delivery fell 0.1 percent to $1,302.40.

"Gold is struggling to go anywhere right now, the European situation is quite serious and the market is certainly running scared, on the back of that we would have expected to see gold higher, but it is being kept back by dollar strength," said Ole Hansen, head of commodity strategy at Saxo Bank.

Also weighing on the precious metal, short-dated Italian bond yields soared to their highest since late 2013. Rising yields tend to dent the appeal of non-yielding gold.

Elsewhere, markets are awaiting U.S. inflation data due later this week that could provide clues to future interest rate increases ahead of the June Federal Reserve policy meeting.

The U.S. currency is heading for its best month in 1-1/2 years.

"Beyond politics, we still see the U.S. rate cycle and U.S. dollar in the driving seat for gold. This should keep a lid on prices for now and supports our short-term neutral view," said Julius Baer analyst Carsten Menke in a note.

Adding to the uncertainty in Europe, Spanish Prime Minister Mariano Rajoy will face a vote of confidence in his leadership on Friday.

On the Asian geopolitical front, Trump and Japanese Prime Minister Shinzo Abe discussed North Korea by phone on Monday and confirmed they would meet before an expected U.S.-North Korea summit.

Spot silver was down 0.25 pecent at $16.43 an ounce.

Platinum was flat at $900.75 an ounce and palladium slid 1.1 percent to $975.72 an ounce.

(Additional reporting by Karen Rodrigues in Bengaluru; Editing by Alexandra Hudson and Adrian Croft)