Gold up but off highs, post-election fiscal crisis eyed

A gold bar and granules are pictured at the Austrian Gold and Silver Separating Plant 'Oegussa' in Vienna October 23, 2012.

NEW YORK (Reuters) - Gold pared gains on Wednesday ending slightly higher, after declines in equities and crude oil knocked bullion off its high, as investors zeroed in on a looming U.S. fiscal crisis following the re-election of President Barack Obama.

Earlier in the day, bullion rose nearly 1 percent as Obama's victory fuelled speculation that four more years of a Democrat in the White House would contribute to an extension of the Federal Reserve's easy monetary policy.

Gold's rally later fizzled as a sell-off on Wall Street deepened worries over the "fiscal cliff," a $600 billion package of tax increases and spending cuts to take effect automatically at the end of 2012, a scenario that could severely strain the economy.

"The re-election of President Barack Obama means we are turning our focus back to the fiscal cliff, and the uncertainty of U.S. policies can send gold in either direction," said Jeffrey Sherman, commodities portfolio manager of DoubleLine Capital LP, which manages more than $45 billion in assets.

Worries about deflationary forces due to the fiscal crisis could weigh on gold. However, huge economic uncertainty related to the country's fiscal accounts in 2011 had boosted safe-haven demand and sent gold to a record high.

Spot gold was up 0.2 percent at $1,71 9 . 51 an ounce by 3:18 PM ES T (2 051 GMT), after hitting a session low at $1,703.80, which was nearly $30 below an earlier high of

$1,731.40.

U.S. gold futures for December delivery settled down $1 at $1,714 an ounce.

Trading volume was at a strong 270,000 lots, or 53 percent above its 250-day average, and set to finish at its h ighest in about 2 months, preliminary Reuters data showed.

FISCAL CRISIS EYED

A split Congress will keep open the likelihood of messy negotiations to avert the fiscal crisis that risks pushing the economy into deep recession.

Gold was hit by heavy liquidation pressure from outside markets which were pummelled by economic fears. The S&P 500 index fell over 2 percent to drop below 1,400 points for the first time in more than two months, and U.S. crude futures tumbled 4.5 percent.

Andrew Cole, fund manager with Baring Asset Management, said: "I think people would be less inclined to own U.S. stocks and bonds in an event where they don't know how policy will be fixed."

However, he saw an eventual return to more tolerance of risk, which would see gold weaken.

Other precious metals also tracked the boarder markets to reverse earlier gains.

Silver edged down 0 . 3 percent to $31. 87 an ounce. A mong platinum group metals, platinum was down 0.6 percent at $1,540. 2 4 , while palladium fell 0. 7 percent to $609.5 0.

(Additional reporting by David Brough. Editing by Andre Grenon and Diane Craft)