Fed taper: A nail in gold's coffin?

For gold, which has plunged 27 percent this year and is on track for its worst performance in over three decades, is the Federal Reserve's decision to begin scaling back its stimulus a nail in the precious metal's coffin?

The reduction in central bank liquidity has further diminished the risk of inflation, which is negative for the yellow metal, said Daniel Morgan, global commodities analyst at UBS.

"I think gold will continue to be under pressure - the reasons to hold gold as a hedge against inflation don't seem to be there," said Morgan, who forecasts gold prices will average $1,200 over the next two years.

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Central bank liquidity has supported gold and boosted the metal's inflation-hedge appeal in the recent years, driving prices above $1,900 in 2011.

"Economic indicators point to an expansion in the global economy in 2014, and gold isn't going to perform in that environment. You should have your money elsewhere," he added.

After falling 1 percent on Wednesday, following the central bank's announcement it begin tapering its $85 billion-a-month bond-buying program in January, gold recovered some losses on Thursday. Spot gold was last quoted up 0.4 percent at $1,221 an ounce.

(Read more: Fed to taper bond buying by $10 billion a month)

Another headwind for the precious metal is strength in the U.S. dollar, said Timothy Riddell, head of global markets research, Asia ANZ. The greenback has been a major beneficiary of the Fed's decision to taper, with the dollar index rising 0.6 percent on Thursday.

Is taper priced into gold?

The U.S. dollar and gold usually display an inverse correlation - when one rises, the other falls. Gold is priced in dollars, thus when the currency strengthens, the price of the yellow metal typically drops.

"Firmness of the U.S. dollar - one of the other aspects of withdrawing quantitative easing - will reduce some of the reasons to be long gold," he said.

From a technical perspective, the risk is to the downside, Riddell said, noting that a close below $1,220 could see gold move to $1,180-85.

(Read more: El-Erian: Fedtaper begins-what happens next?)

Ephrem Ravi, head of metals and mining sector, Asia ex-Japan equity research at Barclays says taper is largely priced into gold, and expects it to trade within a range over the coming months.

"Prices have been hanging around the $1200-$1300 per ounce for a few months now, until tapering is completed it will remain rangebound without much direction," he said.

—By CNBC's Ansuya Harjani; Follow her on Twitter: @Ansuya_H

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