PRECIOUS-Gold down on day, week amid last-ditch US budget talks

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* Palladium hits fresh March highs; platinum sinks to August lows
* Spot gold, futures down half a pct, wiping out weekly gain
* Markets on tenterhooks as Obama calls last-ditch budget meeting

(Adds moves in platinum, palladium)By Barani Krishnan and David Brough
NEW YORK/LONDON, Dec 28 (Reuters) – Gold fell on Friday, wiping out what would have been its first weekly gain since November, as traders priced the market lower while awaiting the outcome of last-ditch U.S. budget talks ahead of a year-end deadline.

Palladium saw the sharpest move of the day. After hitting fresh early March highs, it gave back two-thirds of Thursday’s gains as funds took profits. Platinum sank to four-month lows.

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Most markets were on tenterhooks as President Barack Obama met with congressional leaders from the Democratic and Republican parties at the White House to restart stalled talks on the budget.

The dollar rose, U.S. Treasury yields hit two-week lows and stocks on Wall Street headed for their longest losing streak in three months as the politicians sought to avoid $600 billion in tax increases and spending cuts set to take effect on Jan. 1.

Failure to reach a deal will tip the U.S. economy over a “fiscal cliff” and into possible recession, economists warn.

Spot gold ended the day close to its day lows around $1,655 an ounce, versus Thursday’s last bid at $1,663.29.

U.S. gold futures for February delivery settled down $7.80, or 0.5 percent, at $1,655.90 an ounce in New York.

Traditionally a safe haven and inflation hedge that investors rush to in times of trouble, gold has lately behaved more like a risk asset – often rising and falling with the stock market and sometimes following the dollar.

LITTLE LIGHT ON GOLD DIRECTION

Spot gold and futures showed a modest loss on the week after Friday’s decline wiped out gains built from Monday through

Thursday. Despite the somewhat surprising swing, most dealers found this week’s moves in gold too puny for a market that had been modeled as a key hedge to the U.S. fiscal crisis.

“It strikes me that the gold market really doesn’t quite know where to go at this moment,” said Adrian Day at Adrian Day Asset Management in Annapolis, Maryland.

“Light trading in the holidays obviously has a distorting effect on prices but if anything, the moves should be exaggerated, not muted like this.”

In Friday’s session, volume in gold futures was around 60 percent below the 30-day average, making it one of the least traded markets on the 19-commodity Thomson Reuters-Jefferies CRB index.

Although they have moderated now, gold prices ran up sharply in the first and third quarters of this year, aided by ultra-loose monetary policies in the world’s leading economies, bullion buying by central banks trying to diversify foreign reserves and concerns over the financial stability of the euro zone.

The rally in those quarters has booked a 6 percent gain on the year, extending gold‘s winning streak to a 12th consecutive year.
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