Gold settles 1% lower at $1,319 as the dollar firms

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Gold futures settled 1 percent lower at $1,319 on Wednesday, retreating from the previous session's one-month high, as gains in the dollar versus a basket of currencies prompted some investors to cash in gains.

Spot gold, meanwhile, fell around 2.5 percent on Wednesday, as signs of continued economic recovery in the United States and Europe prompted funds to exit the bullion market after its recent gain to a one-month high.

A combination of a sharp rise in the U.S. dollar, tumbling crude futures and rally in Treasury yields seen as U.S. short-term interest rates hit bullion's appeal as a hedge, sending gold to its biggest one-day loss in a month.

Spot gold was down 2.2 percent to $1,318 an ounce, having hit $1,347.69 an ounce earlier, its highest since June 20. U.S. gold futures for August delivery settled $15.00 lower at $1,319.70 an ounce.

Gold extended losses throughout the session after data showed new U.S. home sales vaulted to a five-year high in June. Other reports showed that private industry in the euro zone expanded for the first time in more than a year in July, a month when U.S. manufacturing output and hiring grew.

"The higher U.S. Treasury yields and strong economic data is renewing the idea that maybe the Fed would start tapering in September" earlier than gold investors had thought, said Bill O'Neill, partner of commodities investment firm LOGIC Advisors.

Prior to Wednesday's selloff, gold had climbed nearly 6 percent in the last four sessions, after Federal Reserve chief Ben Bernanke last week left open the option to scale back the Fed's massive bond purchase program if the economic outlook shifted.

(Read more: Dennis Gartman: Gold is going 'several hundred dollars higher')

Among other precious metals, silver dropped 2 percent to $20 an ounce. Spot platinum was down 0.1 percent to $1,446 an ounce, while spot palladium was up 0.7 percent to $744 an ounce.

Aquarius Platinum said on Wednesday fourth-quarter production rose 22 percent boosted by improvements at its Kroondal mine in South Africa but warned of a still "difficult and complex" environment for platinum producers.

Platinum group metals have been supported during gold's fall this year by concerns over the prospect of supply disruptions from major producer South Africa, source of three out of four ounces of the world's platinum output.