Gold Sinks on Debt Deal Hopes

Gold fell to its lowest in three-months on Tuesday as hopes that policymakers are close to resolving U.S. debt negotiations in Washington lifted stock markets, curbing interest in the metal as a refuge from risk.

European shares rose for a fourth session in a row, Asian stocks hit five-month highs and the dollar index firmed on signs that a deal could soon be reached in Washington to avert a damaging debt default.

U.S. Senate Majority Leader Harry Reid, a Democrat, said after a day of talks on Monday with his Republican counterpart, Mitch McConnell that they had made "tremendous progress" and suggested a deal could come later on Tuesday.

Spot gold shed 1.2 percent to $1,256.96 by 0943 GMT, while U.S. gold futures for December delivery were down $20.00 at $1,256.70. Earlier spot prices hit their lowest since July 10 at $1,253.29.

Gold prices have gained little from a U.S. government shutdown that is now in its third week.

"Just because gold hasn't benefited all that much from what's going on in Washington doesn't mean it won't go down if there's a resolution," Natixis analyst Nic Brown said.

"Our forecasts are for lower prices, under a central scenario that the (debt talks are) sorted and the U.S. economy continues to improve," he said. "The effect of the budget-related shutdown will be that while it hits (growth), it reduces the deficit more quickly. That's negative for precious metals."

The metal has shed a quarter of its value this year on expectations that the Federal Reserve is set to withdraw its monetary stimulus programme, which has lifted gold by keeping up pressure on long-term interest rates and stoking inflation expectations.

The precious metal is now on track for its first annual price fall since 2001.

ETF HOLDINGS DROP

Investors continued to liquidate bullion, with holdings of the world's largest gold-backed exchange-traded fund, New York's SPDR Gold Trust, falling another 1.8 tonnes on Monday to 4-1/2 year lows.

The trust reported its biggest weekly outflow in three months last week, of just over 9 tonnes.

"Investors are becoming increasingly worried about gold's long-term stance as an investment product, whilst U.S. equities continue to remain near all time highs," MKS Capital said in a note.

In Asia, a key centre for physical gold demand, prices held in a narrow range overnight, with a number of markets closed for holidays, including Singapore and Indonesia.

Among other precious metals, silver was down 2.3 percent at $20.74 an ounce. Spot platinum was down 1 percent at $1,362.74 an ounce, while spot palladium was also fell 1 percent to $705 an ounce.

Platinum's premium over gold held near its highest in a month on Tuesday at just over $100 an ounce as gold underperformed. It hit its lowest since May earlier this month at just $45 an ounce. (Reporting by Jan Harvey; Editing by Veronica Brown)