"There is some heavy selling by fund investors and leveraged money, but physical gold demand should benefit in the long run from the fiscal cliff after these short-term fluctuations,'' said Miguel Perez-Santalla, vice president of physical gold dealer BullionVault.
Spot gold was down 0.2 percent at nearly $1,693 an ounce, having earlier hit a low of $1,684.40, the weakest since Nov. 6.
U.S. gold futures settled down $2 an ounce at $1,693.80, with trading volume more than 20 percent below its 30-day average, preliminary Reuters data showed.
Republicans and Democrats dug in on U.S. budget talks to avoid the $600 billion in tax hikes and spending cuts due to kick in the New Year on Wednesday, with both sides urging quick action but offering no compromises in a political stare-down that shows no signs of breaking.
Physical Buying Strong
Despite gold's recent pullback, physical demand should underpin the market at lower prices, traders said. Holdings of the world's largest gold-backed exchange-traded fund, New York's SPDR Gold Trust, hit a record high as thefund reported a 2.4 tonne inflow on Tuesday.
Similarly, physical coin and bullion sales also received a boost from uncertainty surrounding the fiscal cliff.
U.S. Mint's November gold coin sales had their highest November performance in 14 years, while gold dealer BullionVault also said it notched net buying of nearly 18,000 ounces in November for a second straight monthly rise.
The metal rose in early session after South Korea's central bank said it bought 14 tonnes of the metal in November, its fourth purchase in about 1-1/2 years.
Central banks have switched to being net buyers of gold from net sellers in the last two years, with most acquisitions made by banks in Asia and the developing world. Central banks buying accounted for 455 tonnes of demand last year.
Among other precious metals, spot silver was down 0.2 percent at $32 an ounce,platinum inched up about 0.1 percent to $1,580 per ounce, and palladium edged up 0.4 percent at about $680 per ounce.