Gold prices rallied on Monday after European policy makers failed to soothe fears of Greek default and contagion to other euro zone countries, prompting investors to seek refuge in the precious metal.

Spot gold was bid at $1,820.99 a troy ounce at 1101 GMT from $1,810.73 late in New York on Friday. The precious metal hit a record high of $1,920.30 on September 6.

However, a stronger US currency which makes dollar-denominated metals more expensive for holders of other currencies capped gold's price gains. It ranged between $1,827.36 and $1,810.73 an ounce.

The cancellation of a visit by Greek Prime Minister George Papandreou to the US to chair an emergency cabinet meeting at home and a regional election defeat for German Chancellor Angela Merkel added to perceptions of a worsening crisis. 

'Buying interest is picking up and given ongoing problems in the euro zone and the financial system, safe-haven demand should remain strong,' said Carsten Fritsch, analyst at Commerzbank. 'Last week's correction was just a short term brief downward move.'     

Spot gold hit a three-week low of $1,761.94 an ounce on Friday.

Gold prices are expected to hit $2,200 by 2012, supported by the economic uncertainties in Europe and the United States, said the chief executive of AngloGold Ashanti , the world's third-largest gold producer.

'The European sovereign debt crisis remains unresolved, underpinning investment demand, and we see an extended period of negative real interest rates,' Morgan Stanley said in a note.

Low or negative interest rates mean there is no opportunity cost to holding gold as major currencies such as the dollar, yen or sterling yield little or nothing in interest. - Reuters