Gold finished the session modestly higher on Thursday, as investors reacted to the likelihood that the U.S. would miss its deadline to avert spending increases and tax hikes, which helped boost safe-haven demand for the yellow metal.
Markets kept a close eye on talks to avert a fiscal crisis in the United States.President Barack Obama was flying back to Washington on Thursday, with the top Republican in Congress reconvening the House of Representatives on Sunday, just as the clock ticked toward a year-end deadline for action to avert the looming "fiscal cliff'' that threatens to push the economy into recession. (Read More: Boehner Needs to Stop Partisan Approach: Hoyer)
Markets found little cheer in news that the number of Americans filing new claims for unemployment aid fell last week to nearly its lowest level in 4 1/2 years, a possible sign that employers have picked up the pace of hiring.
"The effect the jobs data had on gold was via a firming of the dollar,'' said Ross Norman,chief executive of precious metals trader Sharps Pixley.
Spot gold turned positive in mid-morning U.S. trading, rising nearly 0.20 percent to trade above $1,662. It has come off a 4-month low of $1,635.09 struck last Thursday, but remains well below a record high of around $1,920 hit in September 2011.
U.S. gold futures for February settled about $3 higher to end trading at $1,663.70 an ounce.
Favorable U.S. economic data could signal prospects for an end to the ultra-loose monetary policy that has supported gold prices.
"The better the data the more the fear that monetary easing will ultimately come to an end,'' said Credit Suisse analyst Tobias Merath. "Every time there is this fear that monetary easing may not be continued to the extent that was previously expected there can always be a little bit of selling pressure.''
Gold prices have benefited from the loose monetary policy of leading central banks because of gold's appeal as a hedge against inflationary fears.
The United States faces $109 billion in across-the-board spending cuts starting in January unless a deal is reached to either replace or delay them. Democrats want to switch the spending cuts to tax increases for the most part.