Gold edges lower on uncertainty over possible U.S. default

By Clara Denina

LONDON (Reuters) - Gold inched lower on Tuesday as the dollar rose on signs of progress in the U.S. fiscal standoff, while investors' hopes increased that a U.S. debt default will be avoided.

The United States faces an October 17 deadline to raise its $16.7 trillion debt limit.

On Monday, a White House spokesman said it would accept a short-term increase in the nation's borrowing authority to avoid default. An influential senator was also said to be floating a plan to cut federal spending and reform the U.S. tax code as part of a broader deal.

The budget impasse that has shut down parts of the U.S. government entered its second week and still looked set to continue.

"There is a realisation that as difficult and serious as this budgetary situation in the United States is, eventually a solution will be found and the country won't default," Mitsubishi analyst Jonathan Butler said.

Spot gold, steadier initially, fell 0.2 percent to $1,318.40 an ounce by 1232 GMT. It hit a near one-week high at $1,327.94 in the previous session on safe-haven demand.

U.S. gold futures for December fell $6.30 an ounce at $1,319.00.

During the last debate over the U.S. debt ceiling in 2011, gold hit an all-time high of $1,920 an ounce. Congress reached an agreement only at the last minute.

The partial U.S. government shutdown has distracted investors from their main preoccupation in previous weeks: the timing of the U.S. Federal Reserve's reduction of its stimulus.

"The Fed will probably postpone its retreat from quantitative easing, which could help to push prices up," Commerzbank said.

Bullion has lost a fifth of its value this year after the Fed announced its intention to stem the flow of easy money.

Accommodative monetary policies favour gold as low interest rates encourage investors to put money into non-interest-bearing assets.

PHYSICAL SUPPORT

The Chinese market reopened after a week-long National Day holiday, but Hong Kong dealers said they were seeing just small buying interest.

China's net gold purchases from Hong Kong fell 5 percent in August from the previous month, but were still healthy at 110.5 tonnes.

Gold importers in India started processing orders to re-stock ahead of the peak wedding and festival season and after the customs department cleared remaining consignments at a major airport.

Gold imports had virtually come to a halt in India for about two months after a new rule that required a fifth of all imports to be re-exported. Banks are just beginning to place orders after uncertainty over the rules were clarified.

In other precious metals, silver fell 0.4 percent to$22.22 an ounce. It reached its highest since September 20 at $22.44 in the previous session.

Spot platinum gained 0.8 percent to $1,402.50 an ounce, on fears mine strikes in South Africa could hurt supply.

Spot palladium rose 1.1 percent to $708.50 an ounce.

(Additional reporting by A. Ananthalakshmi in; Singapore; Editing by David Evans and David Cowell)