Gold up on weaker dollar as fiscal impasse continues

Gold rose on Monday and recovered from Fridays three-month low as the U.S. dollar retreated after lawmakers failed to reach an agreement over the weekend to extend the nations borrowing capacity and reopen the federal government. Silver, platinum and palladium posted moderate gains.

On the Comex division of the New York Mercantile Exchange, gold futures for December settlement rose by 0.70% to $1 277.10 per troy ounce at 8:12 GMT. Prices held in range between days high and low of $1 278.20 and $1 268.50 an ounce respectively. The precious metal fell to a three-month low of $1 262.60 on Friday and settled the day 1.2% lower, extending its weekly decline to 3%.

Gold managed to recover some of its last week losses as U.S. lawmakers failed to break through the fiscal impasse over the weekend. Senate Republicans blocked Democrats’ plan to suspend the debt ceiling through 2014 on Saturday, while discussions between House Republicans and President Obama also hit a dead end. Senate Democrats rejected a proposal by Republican Senator Susan Collins and Democrat Joe Manchin of West Virginia that would push the next debt ceiling decision to the end of January and provide government funding for the next six months to March.

Senators Harry Reid and Mitch McConnell sat down face to face on Saturday for the first time since July after talks between House Republicans and the White House failed. They both described their discussions as “constructive” but “very preliminary”.

Talks to avoid a U.S. sovereign debt default showed some signs of progress on Sunday but there were still no guarantees for an end to the fiscal deadlock. Despite the Columbus Day federal holiday, both the Senate and House of Representatives are scheduled to be in session on Monday.

Despite the uncertainty in the U.S., gold hasnt seen a lot of safe-haven demand recently and its price remained lower than before the deadlock began. CME Group Inc.’s Comex division stopped the trade of December gold futures for 10 seconds on Friday after the metal lost $20 within a minute, using a “stop-logic” mechanism. It allowed traders to provide additional liquidity and prevent excessive price movements.

Most market players expected the impasse to be short-lived and resolved before the October 17 deadline. Barnabas Gan, analyst at OCBC Bank in Singapore, said for CNBC: “If resolved by Thursday, gold will take a bearish cue and will look to tapering and monetary policy stance for direction.”

Assets in the SPDR Gold Trust, the biggest bullion-backed ETP, fell to 890.98 tons on Friday from 896.38 tons, data on the web site showed. This was the lowest level since February 2009.

Protocols of the Federal Open Market Committee’s September meeting showed that most policymakers felt comfortable to trim the central bank’s quantitative easing program by the end of the year. The minutes revealed that Fed’s surprising decision to refrain from tapering last month was a close call. Sentiment that the bond purchases will be reduced in the fourth quarter and will be brought to an end by mid-2014 returned to the market and limited gold’s physical demand and price gains, leaving the metal at a lower level before the government shutdown began.

The dollar index, which measures the greenback’s strength against a basket of six major counterparts, fell by 0.11% to 80.40 at 8:11 GMT. The December contract held in а narrow range between day’s high and low of 80.45 and 80.35 respectively. The U.S. currency gauge snapped three days of gains on Friday and fell by 0.1% but settled the week 0.3% higher after losing 0.36% in the preceding two five-day periods. Weakening of the greenback makes dollar-denominated raw materials cheaper for foreign currency holders and boosts their appeal as an alternative investment.

Also providing some support for the metal, inflation in China picked up in September, the nations National Bureau of Statistics reported today. Year-on-year, consumer inflation rose by 3.1% from 2.6% in August, exceeding analysts projections for a 2.9% increase. On a monthly basis, Chinas Consumer Price Index advanced by 0.8%, beating both expectations and last months reading of 0.5%. Producer inflation declined by 1.3% after it fell by 1.6% in August, outperforming projections for a 1.4% decrease.

Elsewhere on the precious metals market, silver for December delivery rose by 0.7% to $21.408 per troy ounce at 8:09 GMT and held in range between days high and low of $21.470 and $21.115 an ounce. Platinum January futures traded at $1 378.90 per ounce, up 0.24%, and varied in a days range between $1 379.20 and $1 366.70. Palladium for delivery in December stood at $716.50, up 0.45% on the day, and held in range between days high and low of $716.70 and $710.70 per troy ounce respectively.