On signs that U.S. lawmakers could be making progress toward resolving their differences over the debt ceiling and the government shutdown, gold futures dropped to a new three-month low early Tuesday. That took back gains from the previous session, when prices rose from a previous three-month low. The prospects for a break in congressional deadlock also buoyed the dollar, which added further pressure on gold prices.

Gold was trading at less than $1,260 an ounce Tuesday morning. In late August, the yellow metal was at more than $1,400 an ounce, and in early October 2012, gold was selling for nearly $1,800 an ounce.

Late Monday, Senate Majority Leader Harry Reid said that he was very optimistic about reaching a deal this week to raise the debt limit and to end the government shutdown. That sentiment was shared by Senator Mitch McConnell, the Republican minority leader. However, any deal still has to get past the more contentious U.S. House of Representatives. Further delays almost certainly would lead to a default, as well as further pains associated with the government shutdown.

If Congress and the White House fail to raise the federal debt ceiling by midnight October 17, the federal government will lose its ability to borrow. What that will mean to global financial markets is uncertain. As we said on Monday, if enough banks refuse to accept U.S. Treasury securities as collateral for overnight lending, the result could be a lending crisis that freezes the global financial system. Any shock to the financial system typically boosts the price of gold, and something on this scale could cause demand for gold to skyrocket.

So far, the SPDR Gold Trust (NYSEMKT: GLD) was down about 1.2% early Tuesday morning. Gold miner Barrick Gold Corp. (NYSE: ABX) was about 1.2% lower as well, while Newmont Mining Corp. (NYSE: NEM) was inactive in premarket trading.

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