Selling pressure dried up on Wednesday as President Barack Obama threatened to veto a Republican tax plan as talks to avert a fiscal crisis by the end of the year turned sour despite recent progress. The uncertainty about the US budget talks has dampened investors' interest in gold. After Tuesday's sell-off, bullion prices are on track to end the quarter down almost 6 percent to match their worst quarterly performance since the third quarter of 2008 at the height of the global economic crisis.
"The attraction of holding gold should wane as any agreement that restores...revenue increases and spending cuts over the next 10 years would be an important step in getting the US fiscal house in order," said Edward Meir, metals analyst at brokerage INTL FCStone. Spot gold was up 25 cents at $1,669.79 an ounce by 1:17 pm EST (1817 GMT).
US COMEX gold futures for February dropped 50 cents an ounce to $1,670.20, with trading volume on track to finish below its 30-day average, preliminary Reuters data showed. Spot prices hit their lowest since August 31 on Tuesday at $1,661 an ounce, with traders citing a break through key chart levels and options-related selling. Silver was down 1.2 percent at $31.23 an ounce.
Gold struggled to make headway as expectations grew that negotiations to avert the so-called fiscal cliff - $600 billion in spending cuts and tax hikes due next year, which threaten to push the US back into recession - will be successful. Year to date, gold is up around 7 percent and set for a 12th straight year of growth, driven by rock-bottom interest rates, concerns over the financial stability of the euro zone and diversification into bullion by central banks.
A 7 percent gain in gold this year would be well below an average return of 16 percent over the past 12 years. Among other precious metals, platinum inched down a penny to $1,590.99 an ounce, and palladium was up 1.3 percent at $695.50 per ounce. Underscoring a prospect for shortage, South Africa wants to impose export curbs on minerals such as platinum and iron ore as part of a drive by the government to create more jobs in industry in the continent's biggest economy, a top official said on Wednesday.