Gold rose on Monday as investors assessed the impact of a lower dollar after politicians in Washington showed no signs of making progress to resolve the U.S. budget standoff.
While investors are increasingly worried that the political standoff in Washington will spark greater market volatility as the October 17 deadline to raise the borrowing limit nears, hopes for a deal remain strong, analysts said.
The U.S. Congress is already divided on a spending bill, resulting in a partial government shutdown that is hurting the economy and delaying key data releases.
During the last debate over the U.S. debt ceiling in 2011, gold hit an all-time high of $1,920 an ounce. An agreement was reached by Congress only at the last minute.
"The whole story about the U.S. is clearly key for financial markets at the moment ...the general view on it is that a solution will be found and we will probably see a rebound in markets in general and that is not going to be a very favourable environment for gold," Credit Suisse analyst Karim Cherif said.
"For that reason, I don't see much incentive for investors to be overweight in the gold market as they have been in the past."
Spot gold rose 0.4 percent to $1,315.61 an ounce by 1159 GMT.
U.S. gold futures for December were up $6.10 an ounce to $1,316.00.
The U.S. deadlock pushed the dollar lower on Monday, keeping it close to 8-month lows against a basket of major currencies. A weaker dollar makes it easier for holders of other currencies to buy dollar-denominated commodities like gold.
Though the U.S. shutdown did not spark a lot of safe-haven bids, the prospect of a debt default would, traders said.
"Sentiment remains hesitant towards gold, which has been reflected in the market positioning," Barclays analysts said in a note.
"While the temporary U.S. government shutdown has not proved to be a positive driver for prices, the risk of a debt ceiling breach holds scope to spark interest given gold's response in 2011."
INVESTORS AWAIT PHYSICAL DEMAND
The Commodity Futures Trading Commission's weekly Commitment of Traders data, which details positions in U.S. futures and options markets and is a keenly watched measure to judge investor sentiment, was not released on Friday due to the partial government shutdown.
With no key U.S. data coming in, traders are likely to remain cautious in coming sessions.
Any pick up in physical demand, especially from China which returns from its week-long National Day holiday on Tuesday, will also be in focus.
Dealers said they expected Chinese demand to be good at the current price levels, and a lot stronger if prices fell below $1,300.
In top buyer India, importers were ready to process orders from Monday after the customs department cleared more than a tonne of gold stuck at airports.
In other precious metals, silver rose 0.8 percent to $21.82 an ounce.
Spot platinum gained 0.2 percent to $1,382.49 an ounce after a 1.3 percent increase on Friday, as mine strikes and curbs threatened to hurt supply.
Spot palladium lost 0.3 percent to $694.97 an ounce, having hit a four-week low of $689.47 on Friday.