Spot gold was down 0.23 percent at $1,665.71 an ounce at 1514 GMT, while US gold futures for February eased $2.70 an ounce to $1,668.00. Spot prices hit their lowest since August 31 on Tuesday at $1,661 an ounce, with traders citing a break through key chart levels and activity on the options market as fuelling the move. "There's been a lot of interest in protecting against downside risks," Standard Chartered analyst Daniel Smith said, referring to the options-related trading.
Gold has traded closely in line with stocks this year and tends to benefit from weakness in the dollar, which makes assets priced in the US unit cheaper for other currency holders. But it has struggled to make headway as expectations grew that negotiations to avert the so-called 'fiscal cliff' - $600 billion in spending cuts and tax hikes due next year, which threaten to push the US back into recession - will be successful. "The macro background is improving, and this is creating headwinds for gold," Smith said.
"The safe haven appeal of gold is diminishing." US House of Representatives Majority Leader Eric Cantor said he expected a vote on a Republican offer to avert the crisis on Thursday and that he would have enough votes to pass the measure. Analysts say a quick resolution of the fiscal crisis could in the long-term hurt gold, as it would erode the metal's appeal as a haven from risk and boost interest in other assets. "As the macro environment improves, especially provided the 'fiscal cliff' is avoided, gold investors in developed economies will increasingly look to diversify from bullion and into riskier assets where returns are better, given the ongoing economic recovery and better-than-expected US data," VTB Capital said in a note.
The weakness in the gold price in the past few weeks has triggered renewed physical buying, particularly in Asia, Swiss bank UBS said in a note on Wednesday. "Our flows to India indicate above-average demand this week and in China, strong volumes continue on the Shanghai Gold Exchange, with the month-to-date daily average turnover at 11,498 kg versus the 12-month rolling average of 7,842 kg," it said. "Physical buying out of Europe has also been notable."
Physical demand from China, which is neck-and-neck with India as the world's top gold consumer, is expected to pick up ahead of the Chinese New Year in February. Gold importers in India took advantage of lower prices to buy, as a stronger rupee helped push gold to a two-week low. Gold is on track to drop around 5 percent this quarter, its worst performance since the third quarter of 2008 at the height of the global economic crisis.
But for the year, gold is up around 7 percent and set for a 12th straight year of growth, driven by rock-bottom interest rates, concerns over the financial stability of the euro zone and diversification into bullion by central banks. A 7 percent gain in gold this year would be well below an average return of 16 percent over the past 12 years.
Among other precious metals, platinum was down 0.13 percent at $1,588.99 per ounce, and spot palladium was up 0.63 percent to $690.81 per ounce. South Africa wants to impose export curbs on minerals such as platinum and iron ore as part of a drive by the ruling African National Congress to create more jobs in industry in the continent's biggest economy, a top official said on Wednesday. Silver was down 1.23 percent at $31.23 an ounce.