The selloff in gold extended into the Asian session, with the precious metal falling to as low as $1,269 on Friday, following a 5.4 percent plunge in the U.S. trading session overnight.
According to strategists, the pain is not over for the yellow metal that is trading at its lowest since September 2010, with some not ruling out a fall to $1000 an ounce, or a 20 percent decline from current levels.
"$1200 an ounce, or $1000: all very possible. We have to remember gold prices have risen for 12 years in a row and they were due for a correction. Sentiment plays a very large role in determining its pricing," Gaurav Sodhi, resource analyst at Intelligent Investor told CNBC on Friday.
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Gold, which has declined more than 30 percent since its peak of around $1900 in 2011, has fallen victim to a heavy bout of selling since April. The benign global inflationary environment has lessened the appeal of the metal as a hedge against rising prices. In addition, prospects for a scaling back of liquidity in the world's largest economy, alongside a stronger U.S. dollar, have also weighed on the precious metal.
Jim Iuorio, managing director at TJM Institutional Services, says he has seen a shift in sentiment among investors towards gold, which doesn't bode well for prices.
"Something has changed materially in the sentiment in the gold market and that's become evident to me. Even today when the stocks were taking on the chin and people flocked to bonds, they didn't touch gold," said Iuorio.
With gold falling through a key support level of $1,320 late Thursday, Stan Shamu, market strategist at trading firm IG Markets, says that rallies in the precious metal would be an opportunity to sell.
"It's looking very negative for gold from a fundamental and technical perspective. We have the Fed tapering threat underpinning the U.S. dollar, which is negative for gold. Also, lower money supply is negative," Shamu said.
"Demand-supply dynamics are starting to show signs of strain with China and India not being as big a net buyer of gold as before," he added.
The world's largest gold consumer, India, has taken several steps in recent months to temper demand for the precious metal including raising an import duty to 8 percent from 6 percent earlier in June.
(Read More: How a Gold Fetish is Killing India's Economy)
No Clear Floor in Gold
According to Victor Thianpiriya, commodities analyst at ANZ, the production cost of gold, which is estimated to be around $1200-$1300 an ounce, may not be a good gauge for how low prices will fall.
"That cash cost of production is a moving target. If margins get squeezed, miners could start pulling back on exploration expenditure. To say there is a solid line in the sand that prices can't fall below, is not the right way to look at it," Thianpiriya said.
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He expects gold to trade in a range of $1200-$1400 over the next six months, but is not ruling out moves below $1200, given violent moves in the precious metal recently.
"It's certainly possible gold could fall below $1200 - we also need to see how far the U.S. dollar rally can continue to go," he said.
— By CNBC's Ansuya Harjani