Gold steadied near one-and-a-half-week highs above $1,300 an ounce on Monday, supported by expectations the Federal Reserve would hold off curbing its economic stimulus while the United States eyes a more lasting fix to its budget problems.

Gold posted its best weekly gain in two months last week as bets grew that the Fed would postpone tapering its bond-buying as focus turns to finding a more permanent solution to Washington's fiscal woes.

The US budget deal last week extends the US government's borrowing authority through February 7 and restores federal funding through January 15, threatening a further crisis early next year.

Spot gold was up 0.2 per cent at $1,318.54 an ounce by 0249 GMT. The metal touched $1,325.21 on Friday, its highest since October 8. It rose 3.4 per cent last week.

US gold futures edged up 0.3 per cent to $1,318.50 an ounce.

"Given the US government shutdown and the economic risk that the US economy is facing, expectations for tapering in October seem less strong than before," said Barnabas Gan, analyst at OCBC Bank.

The Fed holds its next policy meeting on October 29 and 30, and Gan said if the central bank decides to stick with its current pace of  bond-buying, gold may rise further towards $1,350.

The US monetary stimulus which has burnished gold's appeal as a hedge against inflation had fueled gold's rally, pushing it to a record $1,920.30 in September 2011. But anticipation that the stimulus would be scaled back dragged bullion down to three-year lows below $1,200 in July, putting it on course for its first annual decline in 13 years.

Gan said he still expects the Fed to decide to start cutting its stimulus at the December meeting, with the US economic recovery story likely to continue.

The sustained decline in holdings of exchange-traded funds as well as tepid physical demand may also limit bullion's gains going forward.

Holdings of the largest gold-backed exchange-traded-fund, New York's SPDR Gold Trust are at the lowest since 2009 and demand from top consumer India has been curbed by policies aimed at restricting imports to tame its current account deficit.

"In our view, gold is likely to struggle to build upon the rally in a sustained fashion unless physical demand shows signs of considerable improvement and investor sentiment turns more favourable," Barclays Capital said in a note. - Reuters