Gold firmed in thin pre-holiday trade on Monday, but prices stayed near a four-month low as the U.S. fiscal stalemate drove investors to the sidelines.
Despite the recent losses, gold remains set for a 12th straight year of gains on ultra-loose monetary policy by leading central banks, concerns over the financial stability of the euro zone, and diversification into bullion by central banks. Gold appeals to investors as a hedge against inflation.
Gold rose 0.43 percent to $1,663.24 an ounce at 1221 GMT, supported by a weaker dollar against a basket of currencies, after falling to its weakest since August at $1,635.09 on Thursday.
U.S. gold for February rose 0.27 percent an ounce to $1,664.50.
Bullion hit an all-time high around $1,920 in September 2011 when a worsening debt crisis in Europe sparked a buying rush.
Hedge funds and money managers slashed their net long gold positions in the week to Dec. 18 to their lowest level since the end of August, according to the Commodity Futures Trading Commission's Commitments of Traders report on Friday.
"The weaker dollar and steady stock markets are giving support to gold. Gold has key support around last week's low of $1,635, with resistance around $1,675, near the lows touched in early November," said Peter Fertig, analyst with Quantitative Commodity Research.
Fertig said gold investors were focused on stalled talks in the U.S. to avert the so-called "fiscal cliff", tax hikes and spending cuts that risk sending the U.S. economy into recession.
"My view is that the fiscal cliff will be avoided at the last minute. If the fiscal cliff is avoided, that should be positive for risk assets including gold," he said.
"As the market had been pricing in that the fiscal cliff might be a reality, there might be a sense of relief."
Some U.S. lawmakers voiced concern on Sunday that the country would go over "the fiscal cliff" in nine days, triggering harsh spending cuts and tax hikes, and some Republicans charged that was President Barack Obama's goal.
Some analysts say an impasse in the U.S. budget talks boosts gold's safe-haven appeal, but others argue the metal is increasingly behaving like a risk asset, which is why a budget deal could offer investors some direction.
World stock, commodity and currency markets were steady on Monday, with tensions over the U.S. budget dispute subdued by a holiday lull in Europe.
Spot gold is poised to test a support at $1,631 per ounce, as it may have completed a rebound from the Dec. 20 low of $1,635.09, according to Reuters market analyst Wang Tao.
Gold demand in India, the world's biggest buyer of the metal, picked up on Monday as buyers were scrambling to purchase limited stocks available with local banks after most overseas sellers left for the Christmas vacation.
Silver was up 0.70 percent to $30.19 an ounce, platinum rose 0.21 percent to $1,537.50 and sister metal palladium firmed 0.88 percent to $682.47 an ounce.
"We have a positive view of precious metals prices in the first half of 2013 on the basis of further money accommodation and a rebound in economic growth," said BNP Paribas in a report.
"Given its strong fundamentals, we believe that palladium has the most upside potential over the next two years."
Norilsk Nickel, the world's largest producer of palladium and nickel, expects the palladium market to remain in a deficit in the next several years largely due to a near depletion of Russian state supplies.
Palladium is mainly used in making vehicle catalytic converters to clean engine exhaust.