Gold touched its lowest price level in seven weeks on Tuesday after strong U.S. economic data reinforced expectations of another interest rate rise in the United States this year and pushed the dollar and U.S. bond yields higher.
The CME's Fedwatch indicator showed markets were pricing in a 77 percent likelihood of a December rate rise after Monday's data showed a surge in U.S. manufacturing activity. U.S. and world stocks also rose to new records as a positive global growth outlook encouraged investment in riskier assets.
A strong dollar makes gold more expensive for holders of other currencies, while higher bond yields reduce the appeal of non-yielding gold.
Spot gold was up 0.21 percent at $1,273.40 an ounce after the dollar and U.S. bond yields weakened from earlier highs. But the gold price earlier touched $1,267.76, its lowest level since Aug. 15 and down more than 6 percent from a one-year high of $1,357.54 in early September.
U.S. gold futures for December delivery settled at $1,274.70 an ounce.
"The factors that pushed gold towards $1,360 in early September are now reversing," Julius Baer analyst Carsten Menke said. "The U.S. dollar and yields have rebounded from their recent lows and it looks like positioning in the gold futures market is somewhat reversing, with some long covering and new shorts."
The net long position of hedge funds and money managers in COMEX gold rose nine-fold in the two months to mid-September, helping push prices higher, but has since fallen sharply.
Menke said he expected a strengthening dollar and normalization of speculative positioning to push gold to $1,200 an ounce by the end of the year. Prices have also been supported by purchases of physical gold by bullion-backed exchange-traded funds.
But ETF holdings tracked by Reuters dropped between Friday and Monday by the most since late July. On the technical side, gold was holding around its 100-day moving average at $1,272.
"This figure will be the key today in restricting any further declines," MKS PAMP trader Sam Laughlin said in a note. "Should gold continue to trade lower, the next target will be the 200-day moving average and key psychological level around $1,250."
Meanwhile silver was up 0.55 percent at $16.633 an ounce but still near its lowest level since Aug. 9.