Gold traded within sight of record highs on Tuesday after a last-minute deal to avoid an unprecedented US debt default and the first bullion purchase by Korea in 13 years, against a backdrop of growing economic pessimism.

Gold defied the strength of the dollar as both assets benefitted from a broad investor push into perceived safe-havens such as German bonds and the Swiss franc, to the detriment of equities and industrial commodities such as copper or crude oil.

The months of wrangling among US lawmakers over the borrowing limit have damaged the image of the world's largest economy. A number of ratings agencies including Standard & Poor's and Moody's Investor Services have warned the country will lose its top-notch rating because of its precarious fiscal position.

Spot gold was last up 0.6 per cent on the day at $1,626.96 an ounce by 1100 GMT, having risen by more than 8 per cent over the last month. US December gold futures were up 0.4 per cent on the day at $1,629.60.

"It's always hard when you've just set a nominal new high to say where we go from here, and given that (gold is) up 8 or 9 per cent over the month, you would think we are due for a pullback," said Credit Suisse analyst Tom Kendall.

"Clearly the state of the US finances is pretty well priced into the gold market right now and I think it's going to take something major to get us up through the next round number -- $1,650 -- and I think a retreat towards $1,550 is more likely in the shorter term."

No default

The US is poised to step back from the brink of economic disaster on Tuesday as a bitterly fought deal to cut the budget deficit is expected to clear the Senate and President Barack Obama's desk.

Just hours before the Treasury's authority to borrow funds runs out -- risking a damaging US debt default -- the Senate was expected to approve the deal to cut the country's bulging deficit and lift the $14.3 trillion debt ceiling enough to last beyond the November 2012 elections.

Risk appetite might return now there is agreement on the country's borrowing limit, but the gloomy economic outlook in the world's largest economy combined with an ongoing euro zone debt crisis could depress such sentiment, traders and analysts said.

"Gold should be lower after the US debt ceiling deal is reached, but it remains firm as people don't trust the dollar and would still like to put their money in gold," said Peter Fung, head of dealing at Wing Fung Precious Metals based in Hong Kong.

Factors supporting gold's appeal included the prospect of an extended period of low US interest rates, yields on Spanish and Italian 10-year government bonds rising to 14-year highs on worries over a new Greek bailout deal, and concerns about the global economy.

Reflecting the ongoing demand for gold was the Bank of Korea's purchase of 25 tonnes of bullion to diversify its foreign exchange reserves away from currencies such as the US dollar and the euro.

South Korea's central bank said it bought the gold between June and July to diversify its foreign reserves despite high prices, marking its first purchase in more than a decade and taking its total gold holdings to 39.4 tonnes.

"This news reiterates the fundamental view that most investors, asset managers, and even central banks hold true -- that gold remains the quintessential currency hedge, a stabilizing asset for portfolios, and a safe haven in uncertain economic times," said David Meger, director of metals trading at Vision Financial Markets, a futures broker based in Chicago.

Gold priced in euros rose nearly 1 per cent on the day to trade at 1,145.41 euros an ounce, with a couple of euros of this week's record highs.

In other precious metals, silver was up 1.1 per cent at $39.68 an ounce, while the platinum group metals were modestly higher, with platinum up 0.1 per cent at $1,790.24 an ounce and palladium up 0.1 per cent at $826.22 an ounce. – Reuters