The metal's rally comes despite a stronger dollar and bullish comments from the Federal Reserve on the U.S. economy, but follows a near 30 percent loss last year.
"Weaker equities will have more of an impact on gold prices than a stronger dollar," said Helen Lau, an analyst at UOB-Kay Hian Securities in Hong Kong.
"Because it is all about allocation by funds. If there is an increase in allocation towards gold and less towards stocks, there will be a decrease in outflows from gold exchange-traded funds (ETFs) and that is a positive for prices," she said.
Lau expects gold to average $1,200 for the year, and likely hit $1,300 in the first quarter.
Spot gold rose 0.5 percent to $1,242.36 an ounce by 0354 GMT. It earlier hit a near three-week peak of $1,245.86.
The metal lost nearly 30 percent of its value last year as global stocks jumped and as the Fed announced plans to begin tapering its bond-buying stimulus.
Outflows from the top eight gold ETFs totalled about 740 tonnes in 2013 as investors shifted money to equities, hurting prices.
On Monday, Asian shares fell to a two-week low after growth in China's services sector slowed sharply last month. The dollar hovered near a four-week high, supported by an upbeat outlook for the U.S. economy.
Physical demand for bullion in China, the world's biggest gold consumer, remained strong with premiums climbing to about$19 an ounce from Friday's $17.
Economic data releases this week could help determine whether the recent rally in gold prices can hold.
U.S. nonfarm payrolls and trade numbers expected later this week will provide clues on the strength of the economic recovery, while the minutes of the December Fed policy meeting - at which the central bank decided to cut back bond purchases - may hint at how aggressive the Fed will be with tapering.
Ben Bernanke, who steps down as head of the Fed at the end of the month, on Friday gave an upbeat assessment of the U.S. economy in coming quarters, though he did temper the good news in housing, finance and fiscal policies by repeating that the overall recovery "clearly remains incomplete".
In what could possibly be his last speech as Fed chairman, Bernanke also said the U.S. central bank is no less committed to highly accommodative policy now that it has trimmed its bond-buying stimulus.