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Singapore - Gold has traded near two-month lows on Wednesday as the first US government shutdown in 17 years kept investors on edge, stoking worries of further liquidation after a sharp 3% drop in the previous session.
Bullion posted its biggest daily percentage drop in more than two weeks on Tuesday following a massive Comex sell order and technical selling once prices fell below $1 300 an ounce.
For the year, gold has shed about 23% of its value largely on fears over a US stimulus cutback.
Gold's safe-haven appeal is usually burnished by uncertain economy and geopolitical tensions. Prolonged politicking around the US budget had initially prompted hopes that gold prices could rise, but safe-haven bids failed to emerge.
"If the government shuts down and people start to save money, why should it be supportive for gold?" said Dominic Schnider, an analyst at UBS Wealth Management in Singapore.
"You don't want to own gold because the (shutdown) could negatively affect the economy and purchasing power is being impaired."
Spot gold edged up 0.5% to $1 291.90 an ounce by 08:47, not too far from the session's low of $1 278.24 - its weakest since August 7.
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.
"A lot of people are scratching their heads because of the aggressive selling. It was a big surprise as no one was expecting this reaction," said a Hong Kong-based precious metals trader.
"You have to react to this selling pressure and I think there is going to be more."
Analysts said the next support for gold was at around $1 270 an ounce. With key buyer China out for the National Day holidays through October 7, prices are not seen bouncing back strongly.
Traders are now closely watching the US situation for more trading cues.
A standoff between President Barack Obama and Republican lawmakers forced the US government to begin a partial shutdown on Tuesday. And now an even bigger battle looms as Congress must raise the debt limit in coming weeks or risk a default that could roil global markets.
A week-long shutdown would slow US economic growth by about 0.3 percentage points, according to Goldman Sachs, but a longer disruption could weigh on the economy more heavily as furloughed workers scale back personal spending.
Some gold traders said the possible impact on the economy and more political drama around raising the US debt ceiling could prompt the Federal Reserve to delay the tapering of stimulus, and turn sentiment towards gold more positive.
But a lot also hinges on seasonal physical demand in China and India towards the end of the year. So far, demand has been muted, dealers said.
Bullion posted its biggest daily percentage drop in more than two weeks on Tuesday following a massive Comex sell order and technical selling once prices fell below $1 300 an ounce.
For the year, gold has shed about 23% of its value largely on fears over a US stimulus cutback.
Gold's safe-haven appeal is usually burnished by uncertain economy and geopolitical tensions. Prolonged politicking around the US budget had initially prompted hopes that gold prices could rise, but safe-haven bids failed to emerge.
"If the government shuts down and people start to save money, why should it be supportive for gold?" said Dominic Schnider, an analyst at UBS Wealth Management in Singapore.
"You don't want to own gold because the (shutdown) could negatively affect the economy and purchasing power is being impaired."
Spot gold edged up 0.5% to $1 291.90 an ounce by 08:47, not too far from the session's low of $1 278.24 - its weakest since August 7.
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.
"A lot of people are scratching their heads because of the aggressive selling. It was a big surprise as no one was expecting this reaction," said a Hong Kong-based precious metals trader.
"You have to react to this selling pressure and I think there is going to be more."
Analysts said the next support for gold was at around $1 270 an ounce. With key buyer China out for the National Day holidays through October 7, prices are not seen bouncing back strongly.
Traders are now closely watching the US situation for more trading cues.
A standoff between President Barack Obama and Republican lawmakers forced the US government to begin a partial shutdown on Tuesday. And now an even bigger battle looms as Congress must raise the debt limit in coming weeks or risk a default that could roil global markets.
A week-long shutdown would slow US economic growth by about 0.3 percentage points, according to Goldman Sachs, but a longer disruption could weigh on the economy more heavily as furloughed workers scale back personal spending.
Some gold traders said the possible impact on the economy and more political drama around raising the US debt ceiling could prompt the Federal Reserve to delay the tapering of stimulus, and turn sentiment towards gold more positive.
But a lot also hinges on seasonal physical demand in China and India towards the end of the year. So far, demand has been muted, dealers said.
