Gold edges higher on softer oil; US midterm elections in focus

Nov 3 (Reuters) - Gold prices inched higher in early Asian trade on Tuesday after surging more than 2% in the previous session, as a sharp drop in oil prices eased inflation concerns, while investors awaited the outcome of US midterm elections later in the day.

FUNDAMENTALS

* Spot gold rose 0.3% to $3,960.80 per ounce by 0032 GMT, extending gains after rebounding from a one-year low hit on Friday.

* US gold futures for December delivery steadied at $3,970.80.

* Oil prices fell more than 7% on Monday as Tehran said contacts between Iran and the United States to end their eight-month war were continuing after days of Iranian talks with Qatari mediators ended with altered proposals but no breakthrough. O/R

* US manufacturing activity picked up in October amid strong domestic demand, keeping inflation at the factory gate elevated.

* Markets are now focused on the US midterm elections for clues on the fiscal policy outlook and broader investor sentiment.

* Traders currently see a 73% chance that the Federal Reserve will raise rates in December, according to CME's FedWatch tool.

* Higher interest rates increase the opportunity cost of holding non-yielding bullion, reducing its appeal to investors.

* The Bank of England is expected to raise rates on Thursday to combat inflation pressure from elevated energy costs, with economists polled by Reuters expecting it to raise bank rate to 4.0% from 3.75%.

* Meanwhile, Japan has made gradual progress towards anchoring inflation around the central bank's 2% target, the Bank of Japan said on Monday, bolstering the case for further policy tightening.

* The European Central Bank will have to raise rates again to prevent high inflation from getting entrenched and markets may be underestimating what is needed to quell price pressures, Slovak central bank chief Peter Kazimir said.

* Spot silver gained 0.3% to $50.79 per ounce, platinum rose 0.2% to $1,451.48 and palladium was up 0.2% at $970.50.