Published October 01, 2013
Gold fell on Tuesday, letting go of slight gains made after the U.S. government entered a partial shutdown, with investors betting the stand-off would be resolved shortly.
After missing a midnight deadline because of a political stalemate in Congress, U.S. federal agencies started to cut back services, potentially putting up to 1 million workers on unpaid leave.
Spot gold was down 0.8 percent at $1315.89 an ounce by 1206 GMT, as investors weighed the impact of U.S. deadlock.
The impasse did however concern investors over whether Congress can meet a more important deadline in mid-October to raise the debt-ceiling limit.
"Certainly (the U.S. debt ceiling) is the kind of thing people are going to be concerned about and that could be the kind of thing that will create some extra volatility for gold," said Daniel Smith, head of metals research at Standard Chartered.
Also supporting gold, the U.S. dollar fell to a near eight-month low against a basket of currencies as investors worried the first U.S. government shutdown in 17 years could hurt the economy and prompt the Federal Reserve to postpone withdrawal of monetary stimulus.
A softer U.S. unit makes dollar-priced commodities cheaper for holders of other currencies.
The last time the U.S. government shut down in 1995/96, gold - which was then trading at less than $400 an ounce - gained about 3 percent.
However, failure to raise the $16.7 trillion debt ceiling by mid-October would have a much bigger impact as it would force the United States to default on some payments - an event that could cripple its economy and send shockwaves round the globe.
"In the worst case, the country could actually face insolvency, and while there is very little chance of it coming to that, such a development would seriously push up gold prices," Commerzbank analysts said in a note to clients.
When the debt ceiling issue came up in 2011, an agreement was reached only at the last minute and gold hit record high of $1,920 an ounce, in part because of the uncertainties surrounding a deal.
Silver dropped 1.1 percent to $21.39 an ounce; platinum fell 0.9 percent to $1386.24 and palladium fell 0.3 percent to $719.75.