Gold fell 1 percent on Thursday as fears the Federal Reserve might withdraw its economic stimulus if the job market improved dramatically prompted funds to reduce their bullish bets.
The metal fell below $1,700 on Thursday for the first time this week on economic worries about the U.S. "fiscal cliff,'' overshadowing its safe-haven appeal. Liquidation by large institutional investors in gold futures on fears of tax hikes in the new year also pressured prices, traders said.
Spot silver, dropped 3 percent for its biggest one-day decline in a month.
Gold's drop came a day after the U.S. central bank adopted numerical thresholds for its monetary policy. It said it would keep interest rates near zero until the U.S. unemployment rate fell to 6.5 percent.
Analysts said the move stirred fears that the U.S. central bank could put an end to its loose monetary policy which has boosted the metal's inflation-hedge appeal.
"With the economy showing some signs of recovery, we may see a 6.5 percent unemployment rate sooner than previously anticipated, so longer-dated funds that are heavily invested in metals are looking to reduce their gold positions,'' said Phillip Streible, senior commodities broker at futures brokerage R.J. O'Brien.
The unemployment rate fell to a nearly four-year low of 7.7 percent in November, but most economists do not expect the rate to fall to 6.5 percent anytime soon.
Spot gold was last down 0.9 percent at about $1,696 an ounce after falling to a one-week low of $1,688.94 earlier.
U.S. gold futures settled down $21.10 at $1,696.80, with volume about 15 percent below its 30-day average, preliminary Reuters data showed.
Spot silver, which has outperformed gold year to date, was down 2.8 percent at about $32 an ounce. Technical selling also weighed on silver as loss accelerated after prices slid below its 50-day moving average.
Deflation Worries, Fiscal Cliff Weigh
Lingering recession fears related to $600 billion of tax increases and spending cuts set to take effect on Jan. 1, 2013 triggered gold selling, traders said.
"The larger holders of futures are concerned with the December 31 mark due to tax consequences, and they tend to even out (this year) and take new positions next year,'' said George Gero, vice president of RBC Capital Markets.
Open interest, a gauge of market activity, has fallen about 12 percent from a one-year high reached on Nov. 23, CME data showed.