Gold prices swelled to a record on the deadlock over raising the U.S. debt limit, as investors sought a refuge from the uncertainty surrounding the possible knock-on effects in financial markets from the drawn-out saga.
Gold's relatively tame response to the breakdown in talks between the White House and Republican Party leaders over the weekend indicates that market participants aren't betting on the U.S. defaulting, analysts say.
"The surprise is that gold is not higher," said Bart Melek, head of commodity strategy at TD Securites. "A default could derail the recovery we've been having. It could unwind everything."
However, the risks of a downgrade to the U.S.'s credit rating are rising, and this could throw a wrench into what's been a sluggish economy recovery.
In recent weeks, investors have flocked to all forms of gold. They had been initially spurred by Europe's sovereign debt woes. Those took a back seat to the negotiations about raising the U.S.'s borrowing limit after Greece secured a second bailout package from fellow euro zone members last week.
The most actively traded contract, for August delivery, rose $10.70, or 0.7%, to settle at a record $1,612.20 a troy ounce on the Comex division of the New York Mercantile Exchange. A fresh intraday record of $1,624.30 an ounce was set.
Thinly traded July-delivery gold settled at a record $1,612.00 a troy ounce, though no contracts changed hands. The front-month contract will stop trading on July 27.
Gold futures are up 8.7% since the beginning of the month, thanks to a streak that saw records broken during four consecutive sessions.
Physically backed gold exchange-traded funds have reported record inflows. In Asia, where investors participate in the gold market through purchases of high-carat jewelry, dealers have also been reporting strong sales.
"The classic safe haven, gold, is reaping the benefit of the mounting aversion to risk," Commerzbank analysts wrote in a research note. "As long as the markets remain in a state of uncertainty, the main specter at present being the U.S. facing quasi-bankruptcy and its rating possibly being downgraded, gold prices are sure to rise."
Gold historically has maintained its value during financial or political shocks, so has become sought after by investors in times of turmoil.
Washington policy makers remained at an impasse over how to raise the U.S. debt ceiling Monday, as Republicans and Democrats pursued competing plans. The parties disagree on key aspects of any deal, such as how much to cut spending and whether to raise the borrowing limit enough to get past the 2012 election or not.
The stalemate must be resolved by Aug. 2 or it may trigger a U.S. default. After this date, the Treasury said it will fall short of funds to meet all of its debt payment obligations.
Gold rose while riskier holdings like stocks and commodities fell. U.S. Treasurys, which are also considered a so-called safe haven investment, also fell because their valuation would be pummeled by any kind of default event.
Even if a deal is reached, the protracted debt ceiling talks have raised the likelihood of a U.S. credit downgrade. Credit ratings agencies Standard & Poor's and Moody's Investor Service Inc. have recently placed America's AAA rating on review for a possible downgrade, citing the drawn-out negotiations and escalating risk of a default.
A downgrade would have wide economic implications for the U.S. as the cost of government debt would rise, likely sparking increases in interest rates on everything from home loans and student loans to credit cards. The increases would come at a difficult time for most Americans, as the rate of recovery slows and unemployment rates remain high.
The political impasse also pressured the dollar lower, as concerns about a U.S. default raised the currency's risk profile.
The ICE Dollar Index fell to 74.025, from 74.242 late Friday in New York.
Gold futures, which are denominated in dollars, appear cheaper to holders of foreign currencies when the dollar eases.
Gold's four-digit price tag is also pushing some investors into silver, a cheap alternative that is also considered a refuge from uncertainty.
Silver for September delivery, the most actively traded contract, ended up 23.9 cents, or 0.6%, at $40.361 a troy ounce.