Gold edged up in quiet trade on Monday on a dollar drop and a mixed bag of U.S. and Chinese manufacturing data, while uncertainty over the outcome of U.S. budget talks kept the metal from rising further.
A record high in the physical bullion held by the world's largest gold exchange-traded fund SPDR Gold Trust underscored strong investment demand, and better Indian bullion buying suggested physical buying could underpin prices, analysts said.
Bullion climbed after Chinese PMI manufacturing data showed the key sector grew last month for the first time in more than a year, while U.S. manufacturing activity unexpectedly contracted in November to its lowest level in more than three years.
"New contract month and new positions are helping gold. We have some bargain hunting on an improvement from China's PMI and after last Wednesday's heavy selling,'' said George Gero, vice president at RBC Capital Markets.
Spot gold was last up 0.1 percent at about $1,717 an ounce.
Newly created longs lifted gold prices, traders said. Last week, gold dropped sharply after Wednesday's 1.3 percent decline due to a December-February contract rollover and worries that the U.S. fiscal crisis might lead to a recession.
U.S. gold futures settled up $8.40 at $1,721.10 an ounce. Trading volume was about 50 percent below its 30-day average, preliminary Reuters data showed.
Markets are getting cautious over the approaching $600 billion in tax hikes and spending cuts that will automatically start in early January. A failure to reach a deal to avert the so-called fiscal cliff could trigger a recession, economists said.
Some analysts say lengthy and acrimonious talks could prompt safe-haven buying of gold. However, others warned long-drawn-out talks could hurt the precious metal if they spark broad-based selling of stocks and commodities.
"As long as there are no signs for a compromise being reached, the downside risks prevail (for gold), even in the case that the fiscal cliff will be avoided,'' Quantitative Commodity strategists said in a note.
Silver rose 0.8 percent to around $33 an ounce.
SPDR Gold, Indian Buying Strong
Gold buyers in India, one of the world's biggest bullion consumers, stocked up on the metal as prices hovered around their lowest in a month.
Underscoring investors' interest in the metal, holdings of gold-backed exchange-traded funds hit a record high, and speculators raised their net length in gold for the third straight week.
Platinum group metals, which are mainly used to make auto catalytic converters to clean exhaust fumes, received a boost after several automakers reported strong U.S. new-car sales for November.