Gold prices fell more than one percent Thursday on signs that Federal Reserve officials are increasingly concerned about the risks of the Fed's asset purchases on financial markets, reducing bullion's appeal as a hedge against inflation.
Minutes from the Fed's December policy meeting showed a growing reticence about further increases in the central bank's balance sheet,which was expanded sharply in response to the financial crisis and recession of 2007-2009.
The minutes also showed several officials thought it would be appropriate to slow or stop asset purchases well before the end of 2013, citing concerns about financial stability and the size of the balance sheet.
"With the news that some policymakers suggested that the Fed could withdraw QE before the end of year, that put a dent on one of the underpinnings on gold, which is expansionary monetary policy," said Mark Luschini, chief investment strategist of Janney Montgomery Scott, a broker-dealer which manages $54 billion in assets.
Economic fears due to unprecedented Fed monetary stimulus,including printing money to buy assets - known as quantitative easing - has been a key driver in boosting gold, a traditional inflation hedge.
Spot gold was down about 1.2 percent below $1,666. U.S. gold futures for February delivery ended down $14.20 an ounce at $1,674.60,with volume in line with its 30-day average, preliminary Reuters data showed.
On Dec. 31 gold closed up seven percent from a year earlier,its 12th consecutive yearly gain.
Bullion began the U.S. session under pressure as investors grew concerned about future U.S. political battles looming in Washington overspending cuts, following this week's deal to avoid sharp U.S. tax hikes.
The precious metal made a strong start to the year along with other financial assets, with commodities hitting multi-week highs on Wednesday, after the U.S. Congress passed a bill to avert an approaching fiscal crisis.
Lawmakers opted to raise taxes on wealthy individuals and families, but left unresolved another sticky issue involving $109 billion in planned spending cuts, promising more political showdowns on the budget in coming months.
"The deal to avoid a fiscal cliff has booted some problems into the long grass by a considerable distance, but there are still issues out there such as expanding the debt ceiling, which could prove to be difficult negotiations," said David Jollie, strategic analyst at Mitsui Precious Metals.
He said that gold had been swept up in a relief rally of financial assets and commodities after the deal to avert the fiscal cliff, but that this had lost momentum on Thursday.
The dollar hit a three-week high against a basket of currencies while the euro plumbed its lowest level since mid-December on concerns that further U.S. budget wrangling could lie ahead.