Gold steadied around $1,733 an ounce on Tuesday, following its biggest one-day rise in two weeks, supported by hopes the United States will resolve its fiscal problems and by buying in response to the Middle East conflict.
Spot gold was up 0.09 percent at $1,732.96 an ounce by 1205 GMT, after rising more than 1 percent on Monday.
U.S. gold traded down 0.06 percent at $1,733.30.
Gold was supported by expectations that U.S. lawmakers would reach a deal to avert automatic tax hikes and spending cuts in early 2013, which could otherwise trigger another recession.
"Gold is acting more like a risk asset," Daniel Brebner, analyst with Deutsche Bank, said, referring to gold's role as a risky investment, like other commodities, that tend to rise when risks like that posed by the U.S. "fiscal cliff" are averted.
However, sometimes gold can act as a safe haven investment, especially in times of great uncertainty.
Easing risks over Greece's debt crisis underpinned gold prices, Brebner said.
Athens approved laws on Monday to enforce budget targets and ensure privatisation proceeds are used to pay off debt, seeking to appease foreign lenders before a critical meeting of euro zone finance ministers.
MIDDLE EAST CONFLICT
The conflict between Israel and the Gaza Strip supported gold prices due to concerns over risks the violence could spread in the region, stoking worries over inflation through the potential impact on oil prices.
"Geopolitical tensions have always had an impact on gold," Ross Norman, chief executive of precious metals trader Sharps Pixley, said.
Norman and Brebner saw a potential linkage in oil and gold prices if the Middle East conflict deepened.
"If the oil market starts to move considerably higher based on Middle East risks, inflationary pressures would grow, and so gold could be seen as a way to hedge against inflationary pressures," Brebner said.
He saw no impact on the gold price from France's rating downgrade by Moody's, saying it had been priced into the market.
European shares fell and the euro dipped on Tuesday after France lost its top-notch credit rating from Moody's, reminding investors of the risks from the euro zone debt crisis.
Technical analysis suggested spot gold may hover below a resistance at $1,738 per ounce for one trading session before breaking this level and rising into a target zone of $1,746-$1,749, according to Reuters market analyst Wang Tao.
Indian banks have been asked by the Reserve Bank of India to restrict financing of purchases of gold in the form of bullion, jewellery and coins or units of exchange traded funds, in the latest measure to restrict gold imports to counter a ballooning fiscal deficit.
CITI SEES GOLD AT $1,749/OZ IN 2013
Citi expected gold to rise to an average price of $1,749 an ounce in 2013 from 2012's $1,679, peaking in the first quarter (1Q) at close to $1,800, as the improving U.S. economy and a stronger dollar limit the upside, it said in a research note.
"Gold may see another short-lived bounce in 1Q13 from further Fed action to replace the ending OT2 (Operation Twist), but signs of fatigue are increasingly apparent," the report said.
The Fed's Operation Twist stimulus programme extends the maturity of the central bank's Treasuries holdings in a bid to lower mortgage rates and other long-term borrowing costs.
Citi forecast silver to average $31 next year, down from this year's $31.30, and to further decline to $26.50 in 2014, as the demand picture is expected to remain slow while supply may continue to rise.
Spot silver inched up 0.15 percent to $33.15 an ounce, after rising 2.5 percent in the previous session.
Holdings of the largest gold-backed exchange-traded-fund (ETF), New York's SPDR Gold Trust fell 0.03 percent on Monday from Friday, while those of the largest silver-backed ETF, New York's iShares Silver Trust fell 0.45 percent on Friday from Thursday.
Platinum inched up 0.04 percent to $1,571.49, while sister metal palladium was last at $639.72, up 0.43 percent.