Spot gold hit a peak of $1,325.70 and was up 0.5 percent at $1,323.80 an ounce at 1007 GMT, while U.S. gold futures for August delivery were up $6.60 at $1,325. Silver was up 1.3 percent at $21.09 an ounce.
Gold posted its biggest weekly rise in three months last week as the threat of escalating tensions in Iraq and the Federal Reserve's lack of commitment to raising interest rates sparked a wave of short covering.
"There are still willing buyers today as there are shorts left, and risk aversion sees fresh inflows," VTB Capital analyst Andrey Kryuchenkov said.
"The greenback is slightly weaker today, while European equities are extending losses from yesterday," he added. "Low volumes and technical trading will prevail this week since there is little else aside form Iraq to drive the market, with hardly any physical flows at the moment."
Gold has been boosted recently by escalating violence in Iraq, where Sunni tribes have joined a militant takeover of northern Iraq. Oil prices were pushed to 9-month highs last week, with a consequent knock-on effect on gold.
Oil slipped below $114 a barrel on Tuesday as concerns eased that escalating violence in Iraq will affect supplies from OPEC's second-largest oil producer.
Supporting gold, European stocks retreated on Tuesday, surrendering early gains, as investors were unnerved by growing signs of economic weakness in Europe.
Germany's Ifo index of business sentiment fell more than expected in June, eating into gains across Europe's major stock markets that had been racked up on merger and acquisition talk.
The dollar edged down 0.1 percent against a basket of currencies, meanwhile.
ETFs SEE INFLOWS
Investor sentiment towards bullion has improved, with the world's largest gold-backed exchange-traded fund, New York-based SPDR Gold Trust, recording a 2.4 tonne increase in its holdings on Monday to 785.02 tonnes.
However, physical demand is still weak in the major markets of China and India as consumers expect prices to fall.
Among other precious metals, platinum was up 0.7 percent at $1,461.60 an ounce, while palladium also rose 0.8 percent to $825.60 an ounce.
South Africa's AMCU union declared a five-month platinum strike "officially over" on Monday, bringing to an end the longest work stoppage in the country's history. Miners are expected to return to work this week.
Platinum prices took support from the strike, but struggled to break significantly higher as wide availability of above-ground stocks prevented a more vigorous price response.
Prices shed the majority of their strike premium earlier in June, Swiss bank UBS said in a note on Tuesday.
"We believe a resolution has already been priced in for some time now, and the most painful - and necessary - part of the correction had already occurred earlier this month," it said.
"We expect the dip that the market had been anticipating on the strike conclusion will not occur; indeed we think that dip occurred 10 days ago when the parties involved agreed 'in principle' to the latest proposals."