Gold settled higher on Friday, after an early dip to a six-month low, but is still on track for its largest annual loss in 32 years as the Federal Reserve's plan to scale back its monetary stimulus and expectations of narrower U.S. government deficits have weighed on bullion.
The Fed said this week that the U.S. economy was strong enough for its massive bond-buying stimulus to be scaled back, winding down an era of easy money that saw gold rally to an all-time high of $1,920.30 an ounce in 2011.
The metal, a traditional inflation hedge and safe haven, also came under heavy selling pressure after the U.S. Congress reached a two-year budget deal earlier in the week, which is set to ease automatic spending cuts and reduce the risk of a government shutdown.
Spot gold hit its lowest since June on Friday at $1,185.10 an ounce, closing in on a 3.5-year low reached on June 28. The market clawed back some ground later in the session, up 1 percent to $1,201 on a combination of short covering and physical buying, traders said.
U.S. gold futures for February delivery settled 0.8 percent higher at $1,203.07 an ounce, but logged in a 2.7 percent loss for the week, and some 28 percent year-to-date, set to halt 12-year consecutive run of gains.
"There is a real fundamental logic behind the selloff in gold, and it comes down to a real change in the way governments look at financing their activities as they are becoming more responsible,'' said Rob Lutts, chief investment officer of Cabot Money Management which has $550 million in client assets.
"People are now saying there is no need for gold as a protection as much,'' Lutts said.
Bullman Asset Management manager Nick Bullman said that gold could fall further as the Fed has only just started to taper, and investors have become very negative towards the metal because there is no sign of inflation.
"We are in an environment where we are going to need a much bigger problem in the world than we foresee for gold to recapture any of its lustre,'' said Andrew Cole, a Baring Asset Management investment manager.