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Gold recovers from two-month low as dollar weakens

By Zandi Shabalala
Gold bars are seen at the Austrian Gold and Silver Separating Plant 'Oegussa' in Vienna, Austria, March 18, 2016. REUTERS/Leonhard Foeger/File Photo

By Zandi Shabalala

LONDON (Reuters) - Gold prices held near a two-month low on Wednesday, ahead of a vote over the U.S. tax reform plan but a potential government shutdown lent support.

Spot gold was steady at $1,266.20 an ounce by 1310 GMT after it hit its lowest since Oct. 6 in the previous session.

U.S. gold futures rose 0.3 percent to $1,268.50 an ounce.

The dollar index was down on Wednesday on uncertainty around a possible U.S. government shutdown if lawmakers fail to reach a budget accord before a Friday deadline.

A softer greenback makes dollar-denominated assets, such as gold, cheaper for holders of other currencies.

"A shutdown in the government should be positive for gold but that could be temporary because no one really expects the U.S. to default," said Capital Economics commodities economist, Simona Gambarini.

In November, gold traded in its most narrow range in 12 years.

Meanwhile, the Republican-controlled U.S. House of Representatives voted on Monday to go to conference on tax legislation with the Senate, moving Congress another step closer to a final bill.

Adding pressure on gold was the market expectation that the U.S. Federal Reserve is almost certain to raise interest rates next week at its final monetary policy meeting for the year. This view was confirmed by a Reuters poll of economists.

"Gold stays under pressure in the short run as the market is repricing a little bit more Federal Reserve activity next year and the global economy is sparking an uptrend, earnings coming in well and the value for safe-haven assets like gold is diminishing," said Dominic Schnider at UBS Wealth Management in Hong Kong.

Capital Economics' Gambarini said the price of gold had not fully reflected expectations of a U.S interest rates next week and in 2017 and therefore saw the yellow metal easing further in the short term.

Gold is highly sensitive to rising U.S. rates, as these lift the opportunity cost of holding non-yielding bullion while boosting the dollar, in which it is priced.

Meanwhile, holdings in the world's largest gold-backed exchange-traded fund, SPDR Gold Trust, fell on Tuesday.

But a November reading of global holdings of gold-backed ETFs showed that they rose by 9.1 tonnes to 2,357 tonnes, with the net inflows coming entirely from Europe as the U.S. dollar fell, the World Gold Council said on Wednesday.

Among other precious metals, silver was nearly unchanged at $16.08 an ounce, after hitting its lowest since mid-July in the previous session.

Platinum eased 0.6 percent to $910.40 an ounce, after touching its lowest in nearly 6 weeks at $908.50. Palladium gained 0.7 percent to $991.80 an ounce.

(Additional reporting by Apeksha Nair in Bengaluru, editing by Louise Heavens)