Gold traded steady on Tuesday following its biggest one-day rise in two weeks, supported by hopes of a US solution to its fiscal problems and Middle East tension, but weighed down by a firmer dollar as a result of France's rating downgrade.
Financial market sentiment has improved in the past two days after US lawmakers expressed confidence that Congress could reach a deal to avert automatic tax hikes and spending cuts in early 2013, which could otherwise trigger another recession.
Rating agency Moody's stripped France of its top-notch rating, chilling the euro which had rallied to its highest in nearly two weeks on Monday and pushing the dollar index slightly higher, weighing on buying interest in dollar-priced commodities from investors holding other currencies.
"People are feeling a bit at ease about the budget talks in Congress," said Yuichi Ikemizu, head of Japan commodity trading at Standard Bank.
"But gold is in a tight range between US$1,700 and US$1,740 until we see a result of the talks at the year end, as the 'fiscal cliff' is the focus of the market."
If Congress reached an agreement, it could trigger a sell-down in gold, some analysts said.
"We suspect that once the final details of a fiscal cliff deal are announced (and provided it exceeds expectations), US equities will push higher, the dollar will gain ground, while gold may decline," Ed Meir, an analyst at INTL FCStone, said in a research note.
Spot gold inched up 0.1 percent to US$1,733.74 an ounce by 0307 GMT, after rising more than 1 percent on Monday.
US gold was little changed at US$1,734.10.
Technical analysis suggested spot gold may hover below a resistance at US$1,738 per ounce for one trading session before breaking this level and rising into a target zone of US$1,746-US$1,749, said Reuters market analyst Wang Tao.
Worries about Greek's debt crisis eased after Athens approved laws to enforce budget targets and ensure privatisation proceeds are used to pay off debt, seeking to appease foreign lenders before a critical meeting of euro zone finance ministers.
Some constructive economic data also helped support market sentiment. US home resales rose in October and a gauge of homebuilder sentiment climbed to a six-year high in November.
Tension in the Middle East is buoying safe-haven demand in gold. Israel's leaders weighed the benefits and risks of sending tanks and infantry into Gaza after six days of Palestinian rocket fire and Israeli air strikes killed more than 100 people.
Holdings of the gold-backed exchange-traded funds edged down to 75.406m ounces on November 19, not far off last week's record high of 75.421m.
Subscribe to Arabian Business' newsletter to receive the latest breaking news and business stories in Dubai,the UAE and the GCC straight to your inbox.