Gold hits 8-week low, loses steam built on U.S. govt shutdown

By Freya Berry

LONDON (Reuters) - Gold slid quickly below $1,300 per ounce to its lowest since early August on Tuesday, unwinding much of the steam built up as investors had anticipated a partial U.S. government shutdown, with most betting it would be resolved shortly.

Spot gold shed 2.4 percent to $1,294.30 by 1323 GMT, having hit a low of $1,288.16. U.S. Comex gold futures for December delivery lost 2.3 percent to $1,295.70.

After posting its best quarter in a year for the July-September period, prices are now looking technically weak with funds having booked profits and little incentive to buy the metal which is still down some 22 percent on the year after crashing in April.

U.S. federal agencies started to cut back services, potentially putting up to 1 million workers on unpaid leave. But the so called "safe-haven" bid built into gold was quickly dissolved as U.S. markets opened.

"We saw a little bit of a build-up in August because of due political risks - these risks are now being priced out again," said Tobias Merath, head of commodities and research investment at Credit Suisse.

"We think there's no proper incentive for investors to buy a lot of gold. In the end, if the investment buying is weak there is very little potential for gold to increase."

Analysts said a close below $1,300 would be very bearish for the market's outlook.

IMPASSE

Other metals followed gold's lead with silver dropping 3.7 percent to $20.83 an ounce, platinum down 1.7 percent to $1,374.74 and palladium at $715.72, down 0.9 percent.

The last time the U.S. government shut down in 1995/96, gold - which was then trading at less than $400 an ounce - gained about 3 percent.

However, failure to raise the $16.7 trillion debt ceiling by mid-October would have a much bigger impact as it would force the United States to default on some payments, an event that could cripple its economy and send shockwaves round the globe.

"In the worst case, the country could actually face insolvency, and while there is very little chance of it coming to that, such a development would seriously push up gold prices," Commerzbank analysts said in a note to clients.

When the debt ceiling issue came up in 2011, an agreement was reached only at the last minute and gold hit record high of $1,920 an ounce, in part because of the uncertainties surrounding a deal.

(Additional reporting by A. Ananthalakshmi in Singapore, Silvia Antonioli and Veronica Brown in London; editing by James Jukwey)