Bullion posted its biggest one day drop in three weeks Thursday, falling 1 percent after repeatedly failing to break above a key technical resistance, its 50-day moving average at under $1,700.
Investor confidence in gold was further eroded when major bullion bank HSBC said in a note that it had halved its exposure to gold, shifting its inflation hedge to U.S. Treasury Inflation-Protected Securities (TIPS).
A recovery in gold prices earlier this week ran out of steam as the metal hit strong overhead resistance between $1,690 and $1,700. Gold has failed to breach that level in the last five sessions in a row.
"There are ... important areas of resistance gold encountered this week and so far unable to break above, which are the multimonth downward trendline, the 50-day moving average and the recent highs," said Adam Sarhan, CEO of Sarhan Capital.
"I expect the recent trading range between $1,695 and $1,625 to continue," he said.
Spot gold hit a low of $1,664.69 at just above its 200-day moving average. It was down 1 percent at $1,668.90 an ounce by 2:19 p.m. EST (1919 GMT)
U.S. COMEX gold futures for February delivery settled down $16.80 at $1,669.90 an ounce.
Trading volume was about 20 percent above its 250-day average, preliminary Reuters data showed, partially boosted by February-April contract rollover ahead of February's first-notice day on Jan. 31.
Silver, which tends to be more volatile than gold, dropped 1.7 percent to $31.68 an ounce.
In the note, HSBC took a much less favorable view of the metal as an inflation hedge. The bank attributed the move to a decline in systematic risks, as the probability of a euro zone breakup fell and "the most apocalyptic" of U.S. fiscal outlooks was avoided.
HSBC cut gold's weight in its 3-year strategic portfolio by 8 percentage points to 7 percent, and by 9 percentage points to 7 percent in its tactical portfolio.
Gold also came under pressure from the U.S. House of Representatives' passage of a bill late on Wednesday to extend the U.S. debt ceiling limit to May 19, clearing it for fast enactment after the top Senate Democrat and White House endorsed it.
The move avoided a repeat of a 2011 standoff between Washington lawmakers that sent gold to record highs at $1,920.30 an ounce, analysts said.
INDIAN DEMAND LANGUISHES
Physical buyers in main gold consumer India reported that they were struggling to sell stocks despite offering discounts to buyers, as the market digested a 50 percent hike in import tax.
Holdings of the world's largest gold-backed exchange-traded fund, the SPDR Gold Trust, fell 1.8 tonnes on Wednesday, bringing its overall outflow for the year to 16.7 tonnes.
More positively for prices, the Russian central bank's First Deputy Chairman Alexei Ulyukayev said on Thursday Russia will keep buying bullion. The bank said in 2005 it planned to lift gold to 10 percent of forex reserves, a level it is approaching after buying around 550 tonnes of gold in the last six years.
Among platinum group metals, platinum eased 0.4 percent to $1,677.50 an ounce and palladium edged up 0.1 percent to $724.50 an ounce.
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