By A. Ananthalakshmi
SINGAPORE (Reuters) - Gold was stuck in a tight range on Wednesday as the U.S. government shutdown dragged on for a second week, but the metal was supported by increasing fears the deadlock could spill over to talks about raising the U.S. debt ceiling.
Gold has been drifting between $1,300 and $1,330 an ounce in the past five sessions, with some safe-haven bids providing support despite a lack of U.S. economic data or a strong rebound in physical demand.
President Barack Obama refused to give ground in a fiscal confrontation with Republicans on Tuesday, saying he would negotiate on budget issues only if they agreed to re-open the federal government and raise the debt limit with no conditions.
Congress faces an October 17 deadline to increase the $16.7 trillion borrowing limit to avert the risk of a default on U.S. debt.
"The support for gold will strengthen as we get nearer to the critical (deadline) next week," said Song Seng Wun, an economist at CIMB. "Until the fear of U.S. government default subsides, gold will gain from safe-haven buying."
Spot gold rose 0.02 percent to $1,318.50 an ounce by 0623 GMT. Gains were limited as the U.S. dollar rose on Wednesday after policy dove Janet Yellen was tapped to head the Federal Reserve.
Other than the debt ceiling deadline, traders are also looking at the Federal Reserve policy meeting later this month for clues on whether the U.S. central bank will begin trimming its stimulus this year.
The Fed stunned markets in September when it stuck to its stimulus measures, saying the bank needs to see more economic recovery before it can begin tapering. The release of economic data has been hampered in the past week due to the shutdown.
CIMB's Song said the tapering would probably not begin this year due to the uncertainties around the U.S. debt ceiling.
WEAK CHINA SUPPORT
Traders had expected gold prices to get a boost when China reopened on Tuesday after a week-long holiday, but buying in Shanghai has been muted.
"The return of China yesterday to the gold market resulted in little price action. With the spot gold price around $20 an ounce lower than when (the holidays) began, the market was hoping for a bit of a bounce, but this didn't eventuate," ANZ analysts said.
Data from Hong Kong showed on Tuesday that China imported more than 100 tonnes of gold for a fourth straight month from Hong Kong. But some analysts have questioned whether demand can stay at these levels through the rest of the year.
(Reporting by A. Ananthalakshmi; Editing by Richard Pullin and Joseph Radford)