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Gold held on to sharp overnight gains in Asian trading on Thursday as weak U.S. economic data and a partial government shutdown raised hopes the Federal Reserve would stick to its bullion-friendly stimulus for longer.
The metal was also supported by a weaker U.S. dollar, which was at eight-month lows as the shutdown continued into a second day with no end in sight.
Analysts think the politicking over the budget could drag on to a more important mid-October deadline to raise the U.S. government's debt limit. Failure to increase the debt limit would push the world's biggest economy into default and roil markets, already on the edge over the outlook for U.S. stimulus.
"As an investor, I would rather focus on how the political dispute over the budget will have an impact on the upcoming resolution of the debt ceiling, which is more important," said Helen Lau, an analyst at UOB-Kay Hian in Hong Kong.
"Because of so many uncertainties people will switch from riskier assets to safe havens like gold."
Lau said the shutdown could possibly delay the Fed's stimulus tapering, helping gold prices.
Spot gold had eased 0.2 percent to $1,311.56 an ounce by 0359 GMT, after gaining 2.2 percent the day before. That helped gold recover most of the losses from earlier this week when one massive Comex sell order rattled investors and sent prices below $1,300 an ounce.
Gold, seen as an inflation-hedge, has lost nearly a quarter of its value this year as investors fretted the U.S. central bank would roll back its $85 billion bond-buying stimulus.
To begin any stimulus tapering, the Fed may need to wait until after it gets data on October to assess any collateral damage from the shutdown and the coming fight over raising the debt limit, Boston Federal Reserve Bank President Eric Rosengren said.
Many federal agencies have stopped collecting and publishing economic data due to the shutdown.
SPDR Gold Trust, the world's largest gold-backed exchange-traded fund and a good indicator of investor sentiment, said its holdings fell 0.46 percent, or 4.2 tonnes, to 901.79 tonnes on Wednesday - the biggest fall in nearly three weeks.