London: Gold rose on Wednesday after a 3 percent fall in the previous session to a two-month low, with the dollar declining as investors focused on the first US government shutdown in 17 years.
A standoff between President Barack Obama and Republican lawmakers forced the US government to begin a partial shutdown on Tuesday. An even bigger battle looms as Congress must raise the debt limit in coming weeks or risk a default that could roil global markets.
Investors have generally taken the view that the US deadlock would prove temporary, but there are growing worries about its implications for talks on raising the US public debt ceiling later this month.
"Gold was expected to get stronger support from the US political shutdown ... it is gaining some ground today (but) it is still at risk of further liquidation," Societe Generale analyst Robin Bhar said.
"There is a view in the market that the longer the US shutdown continues, the more likely you're going to get the agreement to raise the debt level (because) politicians ... may wish to agree on the debt rate quickly ... and that is bearish for gold because you are not going to get the U.S. defaulting."
Gold's safe-haven appeal is usually burnished by economic uncertainty and geopolitical tension. Prolonged US budget talks had initially prompted hopes that gold prices could rise, but safe-haven bids struggled to emerge in previous sessions.
Spot gold gained 1.1 percent to a session high of USD 1,303.06 an ounce, after weaker-than-expected US ADP employment data added pressure on the dollar.
Prices were up 1 percent at USD 1,298.71 by 1231 GMT, after reaching their weakest since August 7 at USD 1,278.24 on Tuesday. US gold futures for December were up USD 11.80 an ounce at USD 1,298.30.
Bullion posted its biggest daily percentage drop in more than two weeks on Tuesday, following a big Comex sell order and technical selling once prices fell below USD 1,300 an ounce.
The sharp slide in the previous session stirred market talk of forced liquidation by a distressed commodities fund and of selling related to a fund rebalancing on the first day of the third quarter, although no details could be confirmed.
"There have been some rumours that a hedge fund was liquidating heavily and then once prices fell through USD 1,300 you just got the technical sellers coming in," Bhar said.
The European Central Bank left its main interest rate unchanged at a record low of 0.50 percent, as recent economic data has shown a nascent recovery taking hold in the euro zone.CHINA HOLIDAY
With key buyer China out for National Day holidays through October 7, prices are not seen bouncing back strongly.
Traders are closely watching the US situation for more cues.
"With the Chinese out until Tuesday next week, the market is likely to weaken further with the absence of the natural bid," ANZ said in a note.
Silver rose 0.9 percent to USD 21.29 an ounce.
Spot platinum was up 0.7 percent at USD 1,383.74 an ounce and spot palladium fell 0.2 percent to USD 714.50 an ounce.
Talks will resume on Thursday to seek an end to a strike that has brought most of the operations of South Africa's Anglo American Platinum to a standstill for nearly one week, the head of the union behind the stoppage said.