Gold ticked up a little in thin pre-holiday trade on Monday as equities regained some strength, but prices stayed near their weakest in four months as the U.S. fiscal stalemate drove investors to the sidelines.
Hedge funds and money managers slashed their net long gold positions in the week to Dec. 18 to their lowest level since the end of August, according to the Commodity Futures Trading Commission's Commitments of Traders report on Friday.
Despite the recent losses, gold remains set for a 12th straight year of gains on rock-bottom interest rates, concerns over the financial stability of the euro zone, and diversification into bullion by central banks.
Gold added 72 cents to $1,656.81 an ounce, having fallen to its weakest since August at $1,635.09 last week.
Bullion, traditionally an inflation hedge, hit a record around $1,920 in September 2011 when a worsening debt crisis in Europe sparked a buying rush.
"We are expecting thin trading volumes due to the festivities and because of this, gold is prone to volatility. I don't to expect any surprises. I believe gold should hold above $1,625," said Brian Lan, managing director of GoldSilver Central Pte Ltd in Singapore.
"It's unlikely that we will see any resolution on the fiscal cliff before the end of the year as the Republicans and the Democrats have differences to iron out. I don't think it can be solved within these few days."
Some U.S. lawmakers voiced concern on Sunday the country would go over "the fiscal cliff" in nine days, triggering harsh spending cuts and tax hikes that could send the economy back into recession.
U.S. gold for February fell $2.30 an ounce to $1,657.80.
Some analysts say an impasse in the U.S. budget talks boosts gold's safe-haven appeal, but others argue the metal is increasingly behaving like a risk asset, which is why a budget deal could offer investors some direction.
In other markets, Asian shares steadied in quiet pre-holiday trade after a fall late last week, with investors unsure whether the United States can avoid a fiscal crisis.
The White House on Friday tried to rescue stalled talks on a fiscal crisis after a Republican plan imploded in Congress, but there was little headway as lawmakers and President Barack Obama abandoned Washington for Christmas.
Silver was little changed