A strong run-up in gold stocks helped send the Toronto stock market modestly higher mid-afternoon Monday as investors nervous about the debt impasse in Washington pushed bullion prices higher.

The S&P/TSX composite index gained 29.6 points to close at 12,788.25 with traders worried that the debt standoff might bring the U.S. to the brink of default.

Meanwhile, the Canadian dollar was lower by 0.20 of a cent to 96.96 cents US amid a housing report that missed expectations.

Statistics Canada said that Canadian municipalities issued building permits worth $6.3 billion in August, down 21.2 per cent from July. Economists had expected a drop of 15 per cent.

Markets focused on getting deal done

On Wall Street, New York indexes were firmly in negative ground as the U.S. government entered a second week of a partial shutdown as Democrats continued to resist calls from Republicans to link funding to changes in the country's three-year-old health-care law and to spending cuts.

Now it's becoming clear that the Republicans intend to extend that linkage to raising the government's debt limit, which will be reached on Oct. 17.

"Everything now is predicated on Washington," said Quincy Krosby, a market strategist for Prudential in New York.

"That is what the market is focused on completely, getting a deal done to avoid a default."

Indexes were off the lowest levels of the session by mid-afternoon. The Dow Jones industrial average fell 136 points, or 0.9 per cent, to close at 14,936 Monday.  The Standard-and-Poor's 500 index fell 14 points, or 0.9 per cent, to 1,676, the lowest in a month. The Nasdaq composite fell 37 points, or 1 per cent, to 3,770.

Democrats insist that Republicans could easily reopen the government if House Speaker John Boehner allowed a vote on an emergency spending bill.

But Boehner calls that a non-starter, saying in a Sunday television interview that "the votes are not in the House to pass a clean debt limit, and the president is risking default by not having a conversation with us."

Growth forecasts revised down

Meanwhile, traders are beginning to worry about the potential economic damage caused by the government shutdown, which is reported to cost the government as much as $300 million a day.

BMO senior economist Robert Kavcic noted in a commentary that his firm has revised down its fourth-quarter U.S. growth estimate to 2.5 per cent from three per cent on the assumption that the shutdown will go on for there weeks.

On the Toronto Stock Exchange, the gold sector was the leading advancer, up almost two per cent as investors looking for safety pushed December bullion ahead $15.20 to $1,325.10 US an ounce.

"Gold will rally in periods when uncertainty is high and thus investors seek the safety of a hard asset," observed Craig Fehr, a Canadian markets specialist at Edward Jones in St. Louis.

"Conversely, gold will rally when the economy is doing much better and inflation expectations are ticking back up. It's really a sentiment asset, a reflection of fear or euphoria in the market over the short term."

Allied Nevada Gold surged $1.04 or 26.6 per cent, to $4.95 after the miner reported record gold production and sales in the third quarter. Its Hycroft mine turned out 52,198 ounces of gold.

Rio Alto Mining shot up 11 cents, or 6.08 per cent, to $1.92 as it reported a record 59,157 ounces of gold production in the third quarter.

Cisco, Google eyeing BlackBerry

The tech sector was also supportive as shares in BlackBerry were up 41 cents, or 5.2 per cent, to $8.29 on the TSX. Reuters reported Friday that the smartphone maker is in talks with Cisco Systems, Google and SAP about a possible sale.

The report came almost two weeks after BlackBerry's biggest shareholder, Fairfax Financial Holdings, offered to take the company private in a deal worth about $4.7 billion.

The energy sector was ahead 0.17 per cent as worries about the economic fallout of the shutdown and reaching the debt ceiling pushed the November contract on the New York Mercantile Exchange down $1.05 to $102.79 US a barrel. Talisman Energy  gained 35 cents to $12.90.

The base metals sector lost 0.85 per cent even as copper prices erased earlier losses to close unchanged at $3.30 US a pound. Teck Resources shed 42 cents to $27.44 Cdn.

Investors also looked ahead to the start of the third-quarter earnings season in the U.S. this week. Dow components JPMorgan Chase and Wells Fargo report on Friday.