Gold hit sessions lows on Wednesday after top Democratic leaders said President Trump was on board with their idea of tying Hurricane Harvey aid to a short-term increase in the debt limit and government funding.
Prices had slipped earlier in the session after House minority leader Nancy Pelosi and Senate minority Chuck Schumer said they are prepared to vote in favor of a three-month debt limit increase and government spending. The plan would also include Hurricane Harvey aid.
However, House Speaker Paul Ryan, a Republican, said the Democrats' proposal is "ridiculous" and "unworkable." The three major indexes pared their gains after Ryan's comments. If a deal is not reached, it could lead to a government shutdown, which would be catastrophic, Standard & Poor's said last week.
Investors have been fretting about the possibility of a government shutdown if the debt limit wasn't raised.
Earlier gold prices hovered around a one-year high touched Tuesday at $1,344.21 an ounce, amidst lingering tension from North Korea's nuclear test on Sunday.
"Rising geopolitical tensions, the hurricane hitting the U.S. and the looming debt ceiling are increasing demand for safe assets," said Danske Bank analyst Jens Pederson.
"These extraordinary factors are also weakening the dollar from the point of view that the Fed may further postpone normalisation of monetary policy, which would be good news as it would keep a lid on U.S. yields."
Both U.S. government bonds and gold are seen as risk-free by investors. Low U.S. Treasury bond yields mean there is little opportunity cost in holding gold, which earns nothing and costs money to insure and store.
Analysts say low U.S. yields mean investors are unlikely to buy Treasuries, which would also weigh on the dollar.
A lower U.S. currency makes dollar-denominated gold cheaper for holders of other currencies, which could boost demand.