PRECIOUS-Gold bounces from 1-month low, US budget talks drag

* Gold to fall towards $1,678-technicals

* Coming Up: U.S. ADP employment report Nov; 1315 GMT

(Updates prices, activity in physical sector)

By Lewa Pardomuan

SINGAPORE, Dec 5 (Reuters) - Gold edged up on bargain

hunting on Wednesday, but still hovered near its weakest in a

month as talks between the White House and Congress to avoid

year-end tax hikes and spending cuts showed little progress and

kept most investors at bay.

The U.S. economy could slip into recession if the two

parties failed to reach a deal to avoid a year-end budget

crisis. President Barack Obama dangled the possibility of

lowering tax rates in 2013 with a broad U.S. tax code revamp,

but stood firm on insisting rates for the wealthiest must rise

as part of a budget deal with Congress.

"I think there are a few scenarios that we could look at.

They may not come to a real, long-term deal. So we are expecting

that there will be delays, which mean they will extend the

deadline until they come to an agreement," said Lynette Tan,

senior investment analyst at Phillip Futures in Singapore.

"If this happens, gold will probably be pressured in the

short term until the reality that delaying the solution will

ultimately hurt the economy further."

Gold rose $4.10 an ounce to $1,700.84 by 0621 GMT

after falling to $1,690.64 on Tuesday, its weakest since Nov. 6,

on heavy fund liquidation and options-related selling.

U.S. gold futures for February added $7.00 an ounce

to $1,702.80.

Asian shares hit a 16-month high on Wednesday, led by

Chinese equities that surged after comments from China's new

Communist Party chief Xi Jinping that raised hopes for stable

growth.

But concerns over whether the United States could avert the

so-called fiscal cliff, a series of automatic tax hikes and

spending cuts worth $600 billion that will take effect in

January unless Congress acts, kept optimism in check.

"If the U.S. really falls off the 'fiscal cliff', we are

likely to see some buying of gold for store of value and also on

the outlook that the U.S. dollar may depreciate further," said

Tan at Phillip Futures.

"This is likely to give some support to gold."

News that South Korea's central bank had purchased 14 tonnes

of gold in November using its foreign reserves in order to

spread its portfolio risks was largely ignored.

"We continue to see a risk of further sharp moves in gold

after the dead cat bounce yesterday," the ANZ said in a report.

"We are biased towards a near-term technical decline

targeting $1,670 but remain constructive on medium term

fundamentals."

The physical market was deserted, with jewellers waiting for

a clearer price direction.

"There was some buying yesterday but today the market is

quiet once again," said a physical dealer in Singapore.

The euro rose to a seven-week high against the

dollar, while Brent crude was steady around $110 a barrel as the

oil market nursed losses from the previous two sessions on

worries the U.S. fiscal crisis could hurt demand.

Precious metals prices 0621 GMT

Metal Last Change Pct chg YTD pct chg Volume

Spot Gold 1700.84 4.10 +0.24 8.76

Spot Silver 33.03 0.12 +0.36 19.28

Spot Platinum 1585.75 6.65 +0.42 13.84

Spot Palladium 679.00 1.30 +0.19 4.06

COMEX GOLD FEB3 1702.80 7.00 +0.41 8.68 12427

COMEX SILVER MAR3 33.11 0.30 +0.91 18.59 3450

Euro/Dollar 1.3109

Dollar/Yen 82.24

COMEX gold and silver contracts show the most active months

(Editing by Himani Sarkar)

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