Gold slid to a one-week low on Thursday, with investors flocking out of the yellow metal to more risk-sensitive assets.
A repeated failure to break above a key chart level hurt investors' confidence in the metal, and gave the market an excuse to sell as U.S. policymakers postponed talks on extending the U.S. debt ceiling.
A recovery in gold prices this month ran out of steam as the metal hit strong resistance at $1,695, its 55-day moving average and early January high. After failing to break decisively above that level for five straight sessions to Wednesday, gold fell.
Spot gold shed more than $16 to stay pinned below $1,670 and was down about one percent in Thursday's trading. U.S. gold futures for February delivery shed $16.80 to finish trading at $1,669.50 an ounce.
"The danger for gold is that if prices are not seen to be trending ever higher, for a lot of holders of gold, that takes away all the rationale for holding it," Natixis analyst Nic Brown said.
"In that case, not only are there a lot of people who are not going to be buying it, but some of the people who've been sitting on it for the last few years may be looking to get out."
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HSBC said in a Global Asset Allocation note dated Wednesday that it has cut back sharply on its exposure to gold, shifting its inflation hedge from the precious metal into treasury inflation-protected securities.
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.
"Although economic difficulties and policy risks persist, we believe there is now less need for tail-event protection," it said.
"We rebalance our strategic portfolio by considering the distribution of future economic scenarios. We still believe below-trend growth and subdued inflation are likely, but see some improvement in conditions."
Gold also came under pressure from the House of Representatives' decision late on Wednesday to extend the U.S. debt ceiling limit to May 19, avoiding for the time being a repeat of a 2011 standoff that sent gold to record highs at $1,920.30 an ounce, analysts said.
"We suspect that gold was under pressure on Wednesday largely on account of the fact that the U.S. House voted to temporarily suspend the nation's borrowing limit until May 19," INTL FCStone said in a note. "The critical debt ceiling threat seems to have been removed for now."
Indian Demand Languishes
On the physical markets, traders 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.