By Clara Denina
LONDON (Reuters) - Gold fell on Thursday, as investors booked profits after the previous session's gains due to uncertainty about a partial U.S. government shutdown and slow demand in key physical markets.
The metal rose 2.2 percent on Wednesday, posting the biggest daily gain in two weeks, as the dollar fell to an eight-month low and the shutdown showed no end in sight.
Failure to increase the debt limit would push the world's biggest economy into default and shake markets, already on the edge over the outlook for U.S. stimulus.
"There is some profit-taking and volumes are low as investors are not certain of the U.S. political deadlock," VTB Capital analyst Andrey Kryuchenkov said.
"October 17th is the deadline for the U.S. debt ceiling talks, and... as far as gold is concerned, I think there isn't enough conviction in the market for the safe-haven appeal to really materialise."
Spot gold was down 0.7 percent to $1,305.45 an ounce by 1204 GMT. Gold had fallen 3 percent to a two-month low earlier this week, when a big Comex sell order rattled investors and sent prices below $1,300 an ounce.
U.S. gold futures for December were down $14.80 an ounce at $1,306.20.
The metal has lost nearly a quarter of its value this year as investors fretted the U.S. central bank would roll back its $85 billion bond-buying stimulus.
Increased central bank liquidity and a low interest rates environment encourage investors to put money into non-interest-bearing assets such as gold.
After yesterday's weaker-than-expected ADP jobs data catapulted gold higher, investors will continue to watch U.S. economic numbers, although many federal agencies have stopped collecting and publishing economic data due to the shutdown.
The lack of official data on the economy could further delay a reining in of stimulus, Eric Rosengren, head of the Federal Bank of Boston, said on Wednesday.
Uncertainty over the release of the non-farm payrolls data on Friday, was unnerving investors, analysts said.
As a gauge of investor sentiment, SPDR Gold Trust, the world's largest gold-backed exchange-traded fund (ETF) and a good indicator of investor sentiment, said its holdings fell 4.2 tonnes to 901.79 tonnes on Wednesday - the biggest fall in nearly three weeks.
Physical demand remained weak as China was shut for the National Day holidays.
Gold premiums in China fell from over $40 an ounce at the start of July to less than $10 by the end of September, as prices rose, Macquarie said.
"More bearish (is that)... when the gold price fell back in September the premium did not rise as might have been expected, suggesting a non-price related weakening of Chinese demand; in other words that the Chinese might not want much gold," it added.
Silver fell 1 percent to $21.51 an ounce. The metal rose 2.8 percent on Wednesday in its biggest one-day gain in two weeks.
Spot platinum fell 1.2 percent to $1,372.24 an ounce and spot palladium edged down 0.7 percent to $711.47 an ounce.
(Additional reporting by A. Ananthalakshmi in Singapore; editing by Jason Neely)