Gold fell on Monday as investor concern about debt default in the United States, the world's largest economy, receded after President Barack Obama announced a last-minute deal to raise the country's borrowing limit. Spot gold was bid at $1,616.39 a troy ounce, by 1329 GMT, down 0.6 percent from $1,626.59 an ounce late on Friday. Earlier on Monday the precious metal fell more than 1 percent to a low of $1,607.69 an ounce, off a record high of $1,632.30 hit on Friday.
Republican and Democratic lawmakers were expected to vote later on Monday on the deal to raise the US borrowing limit and cut about $2.4 trillion from the deficit over the next decade. "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. "But very soon the market will start to factor in that there isn't that much being done with the fiscal deficit and concerns will re-emerge."
While the deal comes just in time for the August 2 deadline, analysts said uncertainties remain over whether it will be enough for country to maintain its top-notch credit rating, keeping gold's appeal as a hedge against risk intact. "This (plan to raise the debt ceiling) is only one step and the US will still have issues to face looking ahead so it's not an end to the gold bull," said Ross Norman of Sharps Pixley.
The dollar hit a record low against the safe-haven Swiss franc, reversing earlier gains, reflecting growing concerns that the US debt ceiling plan would not be enough to avoid a credit rating downgrade. The most-active US gold futures fell 0.7 percent to $1,619.70 an ounce. Despite Monday's slide, economic and political uncertainty are expected to keep gold attractive to investors.
Ongoing jitters about the eurozone's debt crisis will also boost gold market sentiment. "The prospect of a powerful rally in gold reflects ongoing stress in the financial system and the maintenance of super low interest rates," Deutsche Bank analyst said in a note. Gold has in recent years gained from historically low interest rates, which means there is little or no opportunity cost to holding the precious metal, which pays no dividends or interest.
"There also appears to be a strong perception among investors that gold can provide protection in environments of inflation and deflation," Deutsche said. "Consequently, in almost any economic scenario today the advancing gold price appears to be irreversible."
In South Africa, talks to end a strike on the country's gold mines were set to begin later on Monday. Meanwhile, the National Union of Mineworkers (NUM) it had reached a wage deal with employers in the coal sector to end a week-long strike. Some 100,000 gold miners downed tools on Thursday, halting operations at AngloGold Ashanti, Gold Fields and Harmony Gold. "The readiness of unions to go on strike for extended periods and persistent large gaps between pay offers and demands suggest that settlements in affected sectors may be significantly above (inflation)," Citi analysts wrote in a note.
"While we don't foresee a major negative impact on sales volumes, it amplifies South Africa's already high mining inflation." Spot silver was down 1.3 percent at $39.27 an ounce, while spot platinum fell 0.9 percent to $1,795.24 an ounce. Spot palladium slipped 0.9 percent to $839.15 an ounce, adding to gains after rising 11.7 percent in July - its best monthly gains so far this year.