Gold fell on Friday, wiping out what would have been its first weekly gain since November, as traders priced the market lower while awaiting the outcome of last-ditch U.S. budget talks before a year-end deadline.
Most markets were on tenterhooks as President Barack Obama scheduled a 3:00 p.m. EST meeting at the White House with congressional leaders from the Democratic and Republican parties to restart stalled talks on the budget.
The dollar rose, U.S. Treasury yields hit two-week lows and stocks on Wall Street headed for their longest losing streak in three months as the politicians sought to avoid $600 billion in tax increases and spending cuts set to take effect on Jan. 1.
Failure to reach a deal will tip the U.S. economy over a "fiscal cliff" and into possible recession, economists warn.
Traditionally a safe haven and inflation hedge that investors rush to in times of trouble, gold has lately behaved like a risk asset — often rising and falling with the stock market and sometimes following the dollar.
Spot gold and futures showed a modest loss on the week after Friday's decline wiped out gains built from Monday through Thursday. Despite the somewhat surprising swing, most dealers found this week's moves in gold too puny for a market that had been modeled as a key hedge to the U.S. fiscal crisis.
"It strikes me that the gold market really doesn't quite know where to go at this moment," said Adrian Day at Adrian Day Asset Management in Annapolis, Maryland. "Light trading in the holidays obviously has a distorting effect on prices but if anything, the moves should be exaggerated, not muted like this."
In Friday's session, volume in gold futures was around 60 percent below the 30-day average, making it one of the least traded markets on the 19-commodity Thomson Reuters-Jefferies CRB index
Although they have moderated now, gold prices ran up sharply in the first and third quarters of this year, aided by ultra-loose monetary policy in the world's leading economies, bullion buying by central banks trying to diversify foreign reserves and concerns over the financial stability of the euro zone.
The rally in those quarters has given gold a 6 percent gain on the year, extending its winning streak to a 12th year.
Analysts said heavy profit-taking in gold over the past month — as some bullion owners try to cash in this year's gains — may be offsetting any rally culminating from those buying gold as a safe haven.
"The reality is a lot of supply has come on to the market in the last month, mainly due to people selling gold for profit to avoid higher capital gains taxes next year," he added. "The additional supply, combined with the fiscal uncertainties, is causing the flattish market."
The industry-backed World Gold Council said it expected the rally in bullion to extend into a 13th year in 2013, helped by growing demand for gold in China and India.
India, the biggest buyer of gold, was stocking aggressively for its traditional festive and wedding season, but retail and investment demand for bullion remained sluggish, traders said.
In industry news, a South African lawyer moved to file a class action suit against more than 30 gold firms on behalf of 17,000 former miners who say they contracted silicosis, a debilitating lung disease, due to negligence in health and safety.