Spot gold weakened further on Thursday after dropping 3.5 percent in the previous session, as investors remained nervous about the eurozone debt crisis amid the year-end rush to liquidate positions.
Asian shares retreated and the euro and commodities nursed stinging losses on Thursday, as fears grew that the euro zone debt crisis was spinning out of control after Italy's borrowing costs hit a new high in the euro era.
The pessimism on the eurozone as well as the liquidation of positions by funds, plunged spot gold to its lowest level since late September on Wednesday in its third session of bloodshed.
Precious metals with industrial applications, such as silver and platinum, also fell sharply as the economic outlook dims.
It's not only because of the stronger dollar, the year-end fund redemption and margin call demand from other markets also contributed to the sell-off, said a Shanghai-based trader. We might see further weakness in prices as the sentiment around Europe remains rather bearish.
Spot gold lost 0.4 percent to $1,567.84 an ounce by 0613 GMT, after posting its biggest one-day decline in nearly three months in the previous session.
The Relative Strength Index on spot gold dived to below 27, its lowest in more than three years, indicating an oversold market.
U.S. gold lost 1.2 percent to $1,567.6, before trimming some losses to trade at $1,571.
Technical analysis suggested that spot gold could fall further after breaking below the 200-day moving average, a major support line, but the demise of the bull trend is not a foregone conclusion.
Investors will be watching Spain's debt sales later in the day, as well as inflation and manufacturing purchasing managers index for the euro zone, to gauge the reach of the debt crisis.
We're in for a long sideways volatile market, said Jeremy Friesen, commodity strategist at Societe Generale in Hong Kong, We can go through weeks, if not months, of slow drawn-out process, because it's ultimately a fiscal problem in Europe that needs to be resolved.
Prices are prone to volatile moves at the end of the year on thinning liquidity as many have closed their books for the year and moved to the sidelines of the market, waiting for a fresh start in January.
Despite the steep decline in gold prices, holdings of SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, were unchanged at 1,294.796 tonnes by December 14. The holdings edged down 0.6 tonnes, compared to an 8-percent drop in gold prices.
PLATINUM, SILVER SLIDE
The slowing of China, the world's second-largest economy and top consumer of many raw materials, also piled pressure on industrial metals.
Spot platinum tumbled as much as 3.2 percent to a two-year low of $1,372, before recovering some losses to $1,388.50.
Spot silver dropped to $28.36, its lowest since late September. The metal already fell nearly 12 percent so far this week, pushing the year-to-date performance into the red.
The gold-silver ratio, used to measure how many ounces of silver is used to buy an ounce of gold, rose to 55, its highest since October, 2010.
Some expected silver to test a September low of $26, before prices could stabilise and move up again.
If we can build a bottom in the range of $25 to $28, prices will be able to slowly rise next year, said the Shanghai-based trader.