Gold fell more than 2 percent on Thursday as investor appetite for the metal waned and on growing expectations for rising interest rates that would ultimately make bullion a less attractive investment.
A raft of positive economic data from the United States and more hawkish signals from some other central bank officials have sparked speculation that certain major economies would move to raise interest rates sooner than previously thought.
The European Central Bank's Lorenzo Bini Smaghi said sharper rises in prices of imported goods carry an inflationary threat that could no longer be ignored, reinforcing the view that the ECB could raise rates sooner than expected.
Gold tends to underperform when rates are rising as the opportunity cost -- the premium investors forfeit by not buying a yield-bearing product -- increases.
Spot gold prices fell as low as $1,316.21 an ounce, their weakest since October 22, and were at $1,320.60 at 1634 GMT, against $1,346.36 late in New York on Wednesday. U.S. gold futures for February delivery slid $15.10 to $1,317.90.
The euro touched two-month highs against the dollar after Bini Smaghi's comments and its highest in two months against the yen after ratings agency Standard & Poor's downgraded Japan's sovereign debt.
There is a lot of safe-haven money coming out of gold at this point. Generally, the macro data has been quite positive, particularly for the U.S. ... and of course there is a lot more confidence around Europe as well, said Standard Chartered analyst Daniel Smith.
So that's causing a lot of the net spec position in gold to fall and also the SPDR ETF is dropping pretty sharply and this is particularly important, he said.
GOLD FUNDS SEE OUTFLOWS
Holdings of gold in the SPDR Gold Trust, the world's largest gold-backed exchange traded fund, were unchanged after recording their biggest ever one-day fall on Tuesday.
ETF Securities' London-listed gold fund saw outflows worth nearly 65,000 ounces on Thursday and has seen metal leave the fund every week since the start of the year.
The dollar was under pressure from a series of data releases on Thursday on jobs and demand for big-ticket manufactured goods that missed expectations.
But given that gold's usual inverse relation to the U.S. currency has flipped to its most positive since mid-September, the weakness in the greenback did little to stem the fall in the bullion price.
The Federal Reserve on Wednesday left U.S. interest rates unchanged and reiterated its commitment to its $600-billion bond-buying program. While it acknowledged economic data has improved, the Fed said the pace of growth had not been enough to generate healthy job creation.
Though the Fed's firm commitment to buy $600 billion of bonds is a bullish factor for bullion, preferences for riskier assets like stocks and high interest rate currencies has also increased on the back of this, said Pradeep Unni, an analyst at Richcomm Global Services.
This seems to be dampening gains in gold. In the medium term to long term, gold's direction is northward biased. Data in the coming week should give us further clues on the underlying strength in U.S. economy.
Among other precious metals, silver was bid at $26.80 an ounce against $27.59. Data showed holdings in the largest silver ETF, the iShares Silver Trust, fell to 10,447.70 tonnes on Wednesday from 10,478.08 tonnes.
ETF selling has helped pressure silver prices more than 11 percent so far this month, taking the gold:silver ratio -- the number of silver ounces needed to buy an ounce of gold -- to its highest since late November this month.
Platinum was at $1,788.99 an ounce against $1,810.50, while palladium was at $801.72 against $812.50.