Gold firmed in Europe on Monday as expectations that government measures to address elevated sovereign debt levels may ultimately prove inflationary, and as investors bet interest rates will stay low.

Gains were capped, however, by a return of some appetite for assets seen as higher risk, such as stocks and the euro, at gold's expense, after a spate of well-received economic data helped allay fears for a double-dip recession.

Spot gold was bid at $1,226.60 an ounce at 1114 GMT, against $1,225.40 late in New York on Friday. U.S. gold futures for August delivery fell $2.00 an ounce to $1,228.20.

There are a lot of people who take a longer-term view, said Standard Bank analyst Walter de Wet. Interest rates are low, so for the next six to 12 months, conditions still favor higher gold prices irrespectively of equity markets rallying.

Commodities were higher across the board on Monday, with base metals like copper and aluminum rising, oil prices climbing nearly 2 percent, and cocoa, sugar, coffee and wheat all stronger.

There are obviously people who buy gold as a safe haven asset while risk aversion is high, but there are also people out there who buy gold as a commodity, de Wet added. When there is increased risk appetite, they buy a basket of commodities, which might include gold.

World stocks headed for a fourth session of gains due to optimism over the global growth outlook, with European equities reaching a four-week high. .EU

The euro also extended gains as appetite for assets seen as higher risk improved. The single currency recorded its biggest weekly gain since September last week.

A stronger euro, and consequently weaker dollar, would in normal circumstances benefit gold, though in recent months the usual relationship has inverted as both bullion and the U.S. currency benefit from rising risk aversion.

GOLD ETF HOLDINGS AT RECORD

Investment interest pushed holdings of the world's largest gold-backed exchange-traded fund, New York's SPDR Gold Trust, to a record 1,306.137 tons on Friday.

Investors still have an interest in holding gold in the medium- to long-term to protect against potentially inflationary government measures to service debt, such as quantitative easing.

In a note on Monday, UBS said its economists have pushed back their expectations for U.S. and euro zone rate hikes. Low interest rates are positive for gold, as they cut the opportunity cost of holding non-interest bearing assets.

While we certainly see inflationary threats ahead through the potential for the debt monetization route, that time horizon is some distance in the future, UBS said in a note.

Instead, the reality this year of rising interest rates in the U.S., in the absence of rising inflation or indeed expectations, would not have been gold supportive. As such, our forecast for a looser monetary policy environment provides a positive backdrop to gold over the coming months.

Physical demand from gold's usual chief consumers, like India and the Middle East, has been dented by higher prices.

But in a Reuters interview, the vice chairman of the Gem and Jewelry Export Promotion Council, Rajiv Jain, said Indian gem and jewelry export sales are expected to rise by at least 7-8 percent in 2011.

Other precious metals rose in line with other commodities, with palladium the biggest climber with gains of more than 3 percent. Palladium was at $452.50 an ounce against $439, while platinum was at $1,549.50 against $1,539.50.

Silver was bid at $18.41 an ounce against $18.18.

(Reporting by Jan Harvey; Editing by Alison Birrane)

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