Gold was stuck in a tight range on Wednesday as the US government shutdown dragged on for a second week, but the metal was supported by increasing fears the
deadlock could spill over to talks about raising the US debt ceiling.
Gold has been drifting between $1,300 and $1,330 an ounce in the past five sessions, with some safe-haven bids providing support despite a lack of US economic data or a strong rebound in physical demand.
President Barack Obama refused to give ground in a fiscal confrontation with Republicans on Tuesday, saying he would negotiate on budget issues only if they agreed to re-open the federal government and raise the debt limit with no conditions.
Congress faces an Oct. 17 deadline to increase the $16.7 trillion borrowing limit to avert the risk of a default on US debt.
"The support for gold will strengthen as we get nearer to the critical (deadline) next week," said Song Seng Wun, an economist at CIMB. "Until the fear of US government default subsides, gold will gain from safe-haven buying."
Spot gold rose 0.02% to $1,318.50 an ounce by 0623 GMT. Gains were limited as the US dollar rose on Wednesday after policy dove Janet Yellen was tapped to head the Federal Reserve.
Other than the debt ceiling deadline, traders are also looking at the Federal Reserve policy meeting later this month for clues on whether the US central bank will begin trimming its stimulus this year.
The Fed stunned markets in September when it stuck to its stimulus measures, saying the bank needs to see more economic recovery before it can begin tapering. The release of economic data has been hampered in the past week due to the shutdown.
CIMB's Song said the tapering would probably not begin this year due to the uncertainties around the US debt ceiling.
WEAK CHINA SUPPORT
Traders had expected gold prices to get a boost when China reopened on Tuesday after a week-long holiday, but buying in Shanghai has been muted.
"The return of China yesterday to the gold market resulted in little price action. With the spot gold price around $20 an ounce lower than when (the holidays) began, the market was hoping for a bit of a bounce, but this didn't eventuate," ANZ analysts said.
Data from Hong Kong showed on Tuesday that China imported more than 100 tonnes of gold for a fourth straight month from Hong Kong. But some analysts have questioned whether demand can stay at these levels through the rest of the year.
Precious metals prices 0623 GMT
Metal Last Change Pct chg YTD pct chg Volume
Spot Gold 1318.50 0.20 +0.02 -21.26
Spot Silver 22.27 0.02 +0.09 -26.45
Spot Platinum 1396.99 1.39 +0.10 -8.99
Spot Palladium 707.97 -4.03 -0.57 2.31
COMEX GOLD DEC3 1318.90 -5.70 -0.43 -21.30 14644
COMEX SILVER DEC3 22.32 -0.13 -0.57 -26.37 4326
COMEX gold and silver contracts show the most active months