By A. Ananthalakshmi SINGAPORE (Reuters) - Gold was trading close to a three-week high on Monday, holding its ground from the previous session on hopes that a surprise rate cut in China would boost demand for bullion in the top consumer, though a strong dollar capped gains. China cut interest rates unexpectedly on Friday, stepping up efforts to support the world's second-biggest economy, and could even be prepared to reduce them again, according to sources. Bullion, seen as a hedge against inflation and a sluggish economy, also got support from comments from European Central Bank President Mario Draghi that opened the door for more drastic measures to prevent the euro zone from sliding into deflation. Spot gold was steady at $1,200.90 an ounce by 0354 GMT, after gaining 0.6 percent on Friday, when it hit a three-week high of $1,207.70. "Despite the massive easing that is being initiated by a number of central banks, we are not sure this will be enough to justify a sustained rally (in gold)," said INTL FCStone analyst Edward Meir. The Federal Reserve's relatively hawkish position compared to other central banks and strength in the dollar should keep gold's gains in check, Meir said. Bullion has been pressured by a strong dollar in recent weeks, with the metal hitting a four-and-a-half-year low earlier this month. The dollar was trading close to a four-year high on Monday. A strong greenback makes dollar-denominated gold more expensive for holders of other currencies. Data on speculative positions in gold also buoyed sentiment. Hedge funds and money managers boosted their net long position in gold futures and options to 60,307 lots in the week to Nov. 18, the Commodity Futures Trading Commission said on Friday. That marked the biggest increase in a month and the highest bullish stance since late October. In the physical markets, Chinese prices were trading at a premium of $1-$2 an ounce on Monday, unchanged from the previous session. Traders were hoping that a cut in interest rates would revive appetite for gold jewellery, bars and coins in China. Demand slid by more than fifth in the first nine months of the year, according to the China Gold Association, as buying eased after record consumption last year and as consumers became wary of falling prices. PRICES AT 0354 GMT Metal Last Change Pct chg Spot gold 1200.9 -0.44 -0.04 Spot silver 16.41 0.01 0.06 Spot platinum 1223.9 10.8 0.89 Spot palladium 789 1 0.13 Comex gold 1200.5 2.8 0.23 Comex silver 16.395 0 0 Euro 1.2391 DXY 88.286 COMEX gold and silver contracts show the most active months