Silver also dived 4 percent and platinum group metals fell around 2 percent. Also weighing on gold was news Morgan Stanley Smith Barney has recommended its financial advisers pull client money out of long-time gold bull John Paulson's funds. The announcement stirred speculation the billionaire hedge-fund manager might need to liquidate its gold investments.
"There is a concern among the hedge funds that they will have more redemptions because of the fact that they underperformed the markets this year as a whole," said Jeffrey Sica, chief investment officer of SICA Wealth Management which has over $1 billion in assets. Spot gold was down 1.3 percent at $1,645.10 an ounce by 1:37 pm EST (1837 GMT), having hit a low of $1,635.09, which marked the weakest since August 22.
Silver, which tends to have higher volatility than gold, was down 4.1 percent to $29.71, having hit a four-month low of $29.60 an ounce. Bullion has now fallen 3.5 percent in the last three sessions, partly pressured by hopes as well as uncertainty related to efforts by US legislators to clinch a deal to avert tax hikes and spending cuts which could trigger a new US recession.
Gold has failed to benefit as a safe haven even though a year-end deadline for the "fiscal cliff" looms. On Thursday, Republicans in the US House of Representatives pushed ahead with their own "fiscal cliff" plan that muddles negotiations with the White House to avoid steep tax increases and spending cuts. After this week's sharp sell-off, bullion is on track to end the fourth quarter down over 7 percent, on track for its worst quarterly performance since the second quarter of 2004.
On charts, Thursday's sell-off sent gold's 14-day relative strength index to 25, the area which is considered by most analysts as oversold, for the first time since May. US COMEX gold futures for February delivery were down $26.20 to $1,641.50 an ounce, with volume on track to exceed its 30-day average, preliminary Reuters data showed. Year to date, gold was up 5 percent. It was up as much as 15 percent earlier this year on worries that monetary easing by the Federal Reserve could spur inflation.