By Frank Tang Gold traded flat on Tuesday after the last session's record high, as investors stayed on the sidelines as Washington remained in a stalemate in its budget talks to avert a ratings downgrade or default. Selling related to an option expiration Tuesday also pressured gold prices, even as the United States appeared inching closer to a devastating default as President Barack Obama's Democrats and their Republican rivals were deadlocked over competing plans to raise the debt ceiling. Bullion is still nearly 8 percent higher in July on euro zone debt fears and uncertainty ahead of the August 2 deadline to raise the U.S. debt ceiling. The price of the metal, however, could retreat if a deal to cut long-term U.S. deficit is perceived as deflationary, analysts said. "I think gold will come back below $1,600 an ounce ... And the upside is becoming more and more limited because of the higher supply from scrap sales," said Phillip Streible, senior market strategist with Lind Waldock, a unit of futures broker MF Global. Spot gold edged down 0.1 percent at $1,613.10 by 12:35 p.m. EDT, after hitting a record $1,622.49 on Monday. U.S. COMEX gold futures for August were down $1.30 an ounce at $1,613.50, with trading volume already topping 230,000 lots, set to be one of the busiest sessions in July. Streible said that a test downward at $1,600 an ounce is not out of the question on Tuesday due to heavy positioning of August call and put options near $1,600. Bullion prices should find support near $1,580 an ounce, he said. COMEX August options are scheduled to expire after the market close Tuesday. On weekly charts, gold is targeting a multiyear channel top near record $1,670 an ounce as a break above $1,610 an ounce eliminated the downward bias toward $1,560, said BarCap technical analysts. A broadly lower U.S. dollar due to investor frustration about the debt talks failed to boost gold. The correlation between gold and the dollar also appears broken, indicating gold to decouple from the U.S. currency in the short term as the failed debt talks fanned default fears and dimmed the greenback's prospects. GOLD COULD RETREAT ON U.S. DEAL Some analysts said that a deal would eventually be agreed between Democrats and Republicans to avoid a debt default for the world's largest economy, in a move likely to put some short-term pressure on bullion's recent gains. "How much of a correction there may be and for how long will in large part depend on the specifics of the agreement and whether it will be enough to support the U.S. dollar and reduce investment demand for safe-haven instruments such as gold," said James Steel, HSBC chief commodity analyst. Last week Standard & Poor's warned there was a 50-50 chance the U.S. AAA credit rating could be cut within three months. In fundamental news, South Africa's National Union of Mineworkers (NUM) said on Monday wage talks with the country's big gold miners had broken down and it would give them a 48-hour strike notice on Tuesday. South Africa was the world's fourth-largest gold producer in 2010, after China, Australia and the United States. Spot silver was up 0.5 percent at $40.52, after hitting a two-month high of $41.05 in the previous session. Silver hit a record $49.51 on April 28. Holdings in iShares Silver Trust, the world's biggest silver ETF, rose 42.44 tonnes to 9,891.61 tonnes, their highest since June 10. (Additional reporting by Harpreet Bhal in London; Editing by Lisa Shumaker)

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