Gold eased on Wednesday as the dollar pulled away from eight-month lows, but it was still underpinned by concerns that the U.S. budget deadlock could spill over into talks on raising the debt ceiling.
Gold has held in a narrow $20 range this week as buyers stayed on the sidelines due to a lack of U.S. data and uncertainty over how the stand-off in Washington will play out.
Relief that President Barack Obama has tapped Federal Reserve Vice Chairwoman Janet Yellen to head the U.S. central bank, ending uncertainty about Ben Bernanke's successor, lifted the dollar index.
Spot gold was down 0.7 percent at $1,309.71 an ounce at 0934 GMT, while U.S. gold futures for December delivery were down $14.80 an ounce at $1,309.80.
Analysts said gold's failure to capitalise on the looming debt ceiling negotiations reflected reduced investor confidence in the metal, as expectations the Federal Reserve may soon rein in monetary stimulus may presage a rise in real interest rates and curb inflation expectations.
Tensions over talks to lift the debt ceiling were a key factor driving gold to record highs in 2011.
"A default of the U.S. government should be positive for gold, because it would be the only safe haven U.S. investors would have," Peter Fertig, a consultant at Quantitative Commodity Research, said. "That gold is not reacting so strongly to the developments in the United States is surprising."
Some analysts said this may be because the wider financial markets are not yet pricing in an actual U.S. default.
"If you look at statistics for the gold holdings of the SPDR Gold Trust, they're declining again. That's telling you that large investors are still liquidating gold holdings, and that they are not convinced that this situation will lead to higher prices," Fertig said.
The SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, has seen outflows of nearly 8 tonnes since the U.S. government shutdown on October 1. Its holdings are on track to decline for a sixth straight week this week.
President Barack Obama refused to give ground in a fiscal confrontation with Republicans on Tuesday, saying he would negotiate on the budget only if they agreed to re-open the federal government and raise the debt limit with no conditions.
Congress faces an October 17 deadline to increase the $16.7 trillion borrowing limit to avert the risk of a default on U.S. debt.
BUYING MUTED IN CHINA
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, dealers 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.
India's trade deficit narrowed to a two-and-half-year-low in September, data showed on Wednesday, indicating that the government's bid to curb gold imports, and reduce the deficit, by raising import duty on the precious metal several times this year was having an impact.
"Non-oil imports likely eased on lower gold purchases," Radhika Rao, an economist at DBS in Singapore, said. "(These) came under the hammer as volumes fell sharply on fresh restrictions and lack of clarity in the RBI trade regulations."
Among other precious metals, silver was down 0.9 percent at $22.09 an ounce, tracking losses in gold.
The gold/silver ratio, which measures the number of silver ounces needed to buy an ounce of gold, edged off this week's low of 59.22, its weakest in nearly a month, as silver underperformed.
Spot platinum was down 0.5 percent at $1,388.49 an ounce, while spot palladium was down 0.9 percent at $705.50 an ounce.