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.
Headwinds for Gold
Gold ended up around 7 percent in 2012, the 12th straight year of gains, but faces headwinds this year after posting its worst quarterly performance in more than four years in the last three months of 2012.
Bank Credit Suisse cut its gold price forecasts for 2013 to $1,740 an ounce on Thursday from $1,840 previously, and said in a report that the end of the bull market was in sight.
"A more stable financial environment and improving global growth is likely to see investor demand for defensive assets fade and the market turn lower by (the fourth quarter)" it said. "We do not forecast a bursting bubble collapse in price, more a slow puncture."
Premiums for gold bars were steady in Singapore at $1.10 to $1.20 an ounce to the spot London prices as supply had yet to recover after the Christmas and New Year holidays. Buyers from India, historically the top consumer, were on the sidelines.
India's finance minister said on Tuesday he was looking at further curbs on gold imports to help rein in a current account gap that touched an all-time high in the July-September quarter.
"Physical gold demand may be negatively affected in the next few months by the fact that the Indian government is considering raising duties on gold imports even further," Commerzbank said in a note. "The aim is to tackle the country's record-high current account deficit, for which — according to India's central bank — gold imports are roughly 80 percent to blame."
The Istanbul Gold Exchange reported on Thursday that Turkey's gold imports rose by 57 percent last year to 120.78 metric tons from 79.7 tons in 2011.
Among other precious metals, silver was down nearly two percent to around $30.40 an ounce, platinum edged up about 0.2 percent to trade above $1,564, and palladium dropped nearly two percent to change hands near $689 an ounce.