Gold rose toward record highs on Monday, erasing early losses after data showing a slowdown in US manufacturing activity fed the view that the Federal Reserve might ease monetary policy further to stimulate the economy. In early trade, bullion fell more than 1 percent as US congressional leaders rushed to line up votes for a deal to raise the US borrowing limit and avert a government default.
The precious metal remains vulnerable for a pullback if investors perceive weak economic data and US budget cuts as deflationary, a fund manager said. "Gold looks risky right now because the economic data seems to be overwhelming, and there is a renewed fear on deflation. If you have bad economic data, I don't see how gold can do well" unless it is coupled with inflation which is not evident now, said Jeffrey Sherman, commodities portfolio manager at DoubleLine Capital, which oversees $13 billion in assets.
Spot gold was up 0.2 percent at $1,629.41 an ounce by 11:30 am EDT (1530 GMT), near Friday's record high of $1,632.30. Most-active US December gold futures were up 60 cents at $1,631.80 an ounce. US trading volume was lower than Friday when the market rose. Spot silver was up 0.1 percent at $39.85 an ounce. Safe-haven buying in gold accelerated as US stocks fell more than 1 percent after a strong opening as relief over Washington's debt deal faded following a weak reading on the manufacturing sector.
US manufacturing grew at its slowest pace in two years in July as new orders contracted, a troubling development for the faltering economy. Friday's weak US GDP data also raised the risk of a recession. Bullion investors will watch votes in the US Congress on a plan to cut government spending, form a congressional committee to recommend a deficit-reduction package and raise the US borrowing limit through 2013.
"There is some short-term relief as the risk of an imminent default (for the United States) does seem to have been avoided," said Caroline Bain, senior commodities economist at the Economist Intelligence Unit. The dollar hit a record low against the Swiss franc and a 4-1/2 month trough versus the yen on Monday as optimism about the US evading a default were swiftly outweighed by fears about the government's fiscal condition and a devastating credit ratings downgrade. Platinum group metals turned lower, tracking other industrial commodities. Platinum was down 1.2 percent at $1,789.99 an ounce. Spot palladium slipped 0.8 percent to $833.25 an ounce.
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