Gold fell on Friday, extending losses from the previous day when the U.S. Federal Reserve gave no hint of plans for an imminent stimulus to the economy, which disappointed investors and dampening the metal's appeal as a hedge against monetary easing.
A weaker euro against the dollar also weighed on dollar-priced precious metals, making them costlier for holders of other currencies.
The euro fell after a three-notch downgrade to Spain's credit rating and signs of economic weakness in Italy and Germany, leaving it vulnerable to further falls as concerns ratchet up about a deepening euro zone debt crisis.
Spot gold was at $1,577.30 an ounce by 9:41 a.m. EDT (1341 GMT), down almost 1 percent from $1,589.15 late in New York the previous day. Earlier it hit a session low of $1,561.44, its lowest in a week.
The U.S. gold futures contract for August delivery tumbled nearly 2 percent to an intra-day low of $1,556.4, and then recovered some losses to $1,578.50.
Gold bulls had hoped Federal Reserve Chairman Ben Bernanke would signal further monetary easing, especially after last Friday's U.S. employment data showed a weak job market.
But Bernanke refrained from indicating any short-term aid, such as a fresh round of quantitative easing (QE), though he said the central bank was ready to shield the economy if financial troubles mounted.
The fact that the Fed didn't hint at monetary easing has weighed a lot on gold, and of course in this scenario of risk aversion, the (inverted) correlation with the dollar was restored and is having an impact today, consultant Gianclaudio Torlizzi from T-Commodity said.
The outlook for precious metals in the medium-term, however, remains positive because the central banks will have to undertake an expansive monetary policy sooner or later. They are just waiting for the right time; they don't want to use the last cartridge too soon.
Investors shrugged off a surprise interest cut by China on Thursday as the world's second-largest economy tries to combat faltering growth.
I think the central banks coordinated their action and this time it was China's turn to do the dirty work, Torlizzi said.
The European Central Bank held its main interest rate at 1 percent on Wednesday, resisting international pressure to provide more support for the ailing euro zone economy.
ECB policymaker Ewald Nowotny however said on Friday it was possible the bank could cut to zero its overnight deposit rate, which currently controls market rates.
Now that the 'QE premium' has exited from the price over the last two days, the risk-reward looks favorable, particularly against base metals, Marex Spectron said in a research note.
For the first time this year, we favor owning gold ... The reason is relatively simple - namely positioning. Short positions have been building in gold all year, and it has been on our watch-list. Now those short positions appear to have peaked.
Investors, however, remained concerned about the spiraling euro debt situation which has been slowing the regional economy.
German exports and imports fell sharply in April, data showed on Friday, in the latest sign that Europe's largest economy is beginning to feel the chill from the crisis.
Chancellor Angela Merkel said Europe was ready to act to ensure stability in the euro zone as Spain's credit rating was cut by three notches on Thursday amid expectations it may soon seek EU help for banks beset by bad debts.
In other precious metals, spot silver fell about 1 percent to $28.20 an ounce. Holdings of the largest silver-backed ETF, New York's iShares Silver Trust dipped 0.31 percent on Thursday from Wednesday.
Spot platinum fell 1.3 percent to $1,416.20 an ounce, and spot palladium eased 1.4 percent to $610.22 an ounce.